China On A Rising Path

published 30 May 2006

'China is on a rising path and America welcomes the emergence of a strong and peaceful and prosperous China.'

This tactful remark by President Bush during his 2002 visit to Beijing undoubtedly reflects the thoughts and good will of many Americans. They are awed by what they believe to be the world's fastest growing economy of 1.3 billion people, four times America's population.

Other Americans, however, are rather fearful of the Chinese transformation from a poor backward and stagnant country to a world power. They are pondering and wondering whether China is moving toward a peaceful, democratic market order, or merely from a moribund communistic system to a more energetic nationalistic or even fascistic system. If the new China is advancing along such paths, the future may merely be the troubled past again, entering through another gate.

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A growing point of contention and confrontation is China's monetary policy. The bank of China is maintaining a decade-old exchange rate of 8.28 yuan to the US dollar, which apparently undervalues the yuan while it overvalues the dollar. No matter how the Federal Reserve System inflates and depreciates the dollar, Chinese monetary authorities are keeping in step with the Fed.

Chinese authorities obviously like exchange rate stability that has enabled the Chinese economy to adjust to the world market and expand in an orderly fashion. But the world economy is rather unstable. The United States is suffering huge trade deficits that are rising continually; according to Organisation for Economic Cooperation and Development (OECD) estimates, they may reach $900 billion or 6.7% of US GDP in 2006. The risk of a monetary disaster surely is rising steadily.

Many Americans are quick to lay the blame on the doorsteps of China; the Chinese naturally find fault with American money managers. They may point out that the American trade deficits, which have flooded the world with American dollars, are the inevitable consequence of Federal Reserve monetary policy. To lower interest rates far below market rates is to increase the demand for money. While such a policy would devastate a national currency, it merely floods the world with the primary world currency, the US dollar. Adjustments to global imbalances are rather slow, but they are bound to come.

Asian central banks in particular are inundated with American IOUs, holding some 60 percent of all international dollar reserves. If they should decide to unload their reserves and move into euros or any other currency, the dollar would crash - that is, suddenly lose a large share of its international value. It would inflict instant losses on all dollar holders, upset all bond and stock markets, and depress the world economy. The two biggest dollar holders and creditors, Japan and China, would be the biggest losers, which undoubtedly makes them fearful and reluctant to initiate any unloading and dumping of their dollars. A Japanese or Chinese government that means to strike the United States for any reason could easily trigger the dumping. The crash would be heard around the globe and the effects be felt worldwide.

Economic wars tend to prevent capital from finding productive employment; they may even consume it, causing labour productivity and levels of living to stagnate or even decline. Such wars harbour a danger far greater yet than simple retaliation and economic depression. They may trigger bloody wars between the retaliating parties. Surely, most Western countries are rather hesitant and slow in striking at their neighbours; it takes a majority of political representatives to declare and wage war. But China is no democracy; it is led by a handful of party autocrats who command the largest army in the world. They've possessed an armoury of atomic weapons since 1967, and have known how to send intercontinental missiles on their way since 1970. To aggrieve them with painful trade restrictions and sudden withdrawals of business capital may have ominous consequences.

Moreover, the Chinese autocrats harbour an old grievance in the form of the US military alliance with a secessionist part of China, the island of Taiwan. This old hurt, together with new economic injuries inflicted by American trade restrictions, could strain and ultimately exhaust the patience of the autocrats. In reaction, they may shape the history of the 21st century.

There are a few Americans - chiefly political scientists and military officials - who are sounding the alarm about the Chinese threat. They are speaking largely in political and military terms. China is gradually expanding its military might, purchasing modern equipment from Russia, although the amount of arms spending merely is a fraction of the Pentagon's annual defence budget. But these amounts may change quickly; they are determined by a few autocrats in Beijing.

Some political scientists are dismayed, especially by the total supremacy of the Chinese Communist Party, together with the long Chinese tradition of autocratic rule. In 2004, the People's National Congress, while it made minor concessions to the market order, expressly confirmed the fundamental principles of Chinese power: the leadership of the Communist Party, the people's dictatorship, the socialist road, and Marxian-Leninist-Mao teaching. Few American observers are alarmed by such proclamations.

Communist power has meant bloody terrorism, deadly purges, lethal prison, forced labour and mass executions. According to some estimates, from 1917 to 1976, global communism took the lives of some 110 million people, which compares with 35 million killed in all 20th century wars. Fighting 'exploitation' and 'imperialism', communist regimes have purged capitalists, the rich and the landlords, intellectuals and clergymen, the rightists, tyrants, and counterrevolutionaries.

Marxism-Leninism is alive and well, not only in China, but also in North Korea, Vietnam, Laos, some African countries, Cuba, and in the minds of many South and Central American politicians and revolutionaries. It pollutes the minds of many European and American academics, intellectuals, and politicians. Its terminology may differ from language to language and may change over time, but its arguments about 'class struggle' turn up again and again in many political and economic discussions. In China, the Communist Party (with some 50 million members) presently seems to be divided about its calling and direction.

Some Party leaders favour the new direction toward rapid improvement in productivity and accumulation of national wealth, while others are actively promoting old policies designed to achieve fair distribution of all income and wealth. Some seek to maintain a good relationship with the United States and its Asian neighbours; others emphasise the importance of national power and military might.

They all are faithful students of Marxism-Leninism-Maoism, always ready to follow the party line. When provoked, they may seize the foreign capital that found its way to China in recent years. Closing ranks again, they may want to lead the proletariat of the world to sweep away capitalism and point the way to 'the dictatorship of the proletariat.'

Indeed, they may become the greatest threat the West has ever faced.

Regards,

Hans Sennholfor The Daily Reckoning

The views expressed in the above article are those of the author, and are not necessarily shared by MoneyWeek.

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