What the Ming empire can teach us about the yuan’s devaluation

“In my experience,” Tony Blair told the Beijing Forum in 2010, not long after leaving office as Britain’s prime minister, “you don’t get to understand a country just by reading its political speeches, studying its economic statistics, measuring its output… you understand it best when you understand its culture, its traditions, the special characteristics that have influenced its society, and most of all its people.” Others would have put it more succinctly: to understand a country, you need to understand its history.

News that China’s central bank devalued the yuan last week was a bolt from the blue, sending shockwaves through financial circles. Analysts have concluded that the main motivation was to loosen the peg linking the yuan to the strengthening dollar, in order to breathe life into the economy, following disappointing data on exports. It’s all about China, in other words.

Yet the past reveals that it is not just China’s problems we need fear. Despite what we may think, globalisation is nothing new – and nor are the ways the situation plays out when things go wrong. For many centuries, the Silk Roads have taken goods, currencies, commodities and people across the spine of Asia in both directions, linking economies of different levels of sophistication and at different stages of monetary development across thousands of miles. Sometimes the connections can turn quickly from a source of fortune to a source of trouble.

The problems China is now trying to avoid have a neat parallel with the early 15th century – a time of unprecedented commercial exchange between China, India, the ports of the Red Sea and the Persian Gulf, and a Europe whose spending habits seemed to know no limits. Cities on the trade routes flourished: visitors to Guangzhou saw hundreds of ships waiting to load up on ceramics, fabrics, foodstuffs and manufactured goods to sell along the sea lanes. Galleys in Alexandria groaned under the weight of spices about to be sold across the Mediterranean.

Everyone did well from the rising levels of interaction. Palazzi sprung up in Venice. Disposable incomes in towns such as Ragusa (modern Dubrovnik) quadrupled. The populations of towns along the Malabar coast swelled, while Samarkand, home of the great ruler Timur, became one of the jewels of the world.

The Chinese then, as now, paid close attention, embarking on a golden age of discovery. Expeditions led by Zheng He explored lands thousands of miles away. Travellers such as Ma Huan gathered information from far and wide about this brave new world so the Chinese could better understand it.

The inflows of revenue saw a boom in grandiose building projects, as Beijing was turned into a splendid and impregnable capital. Tens of thousands of workers began work on a giant canal system that would serve as arteries within a dynamic, ambitious Ming empire. Then, at the start of the 15th century, the bubble burst, with devastating results.

The crisis was caused by a series of factors that resonate 600 years later. Political fracture in the Middle East and climate change played a role. But more importantly, a global financial crisis hit as oversaturated markets, currency devaluations and a lopsided balance of payments went awry. Even with growing demand for Chinese and Indian goods across Europe and Asia, there was only so much that could be absorbed and paid for.

It was not that appetites were sated. It was the exchange mechanism that went wrong: Europe in particular had little to give in return for the fabrics, ceramics and spices from the East. With China effectively producing more than it could sell, there were predictable consequences when the ability to keep buying goods dried up. The result has often been described as a ‘bullion famine’ – we would call it a credit crunch.

Global money supplies ran short from Korea to Japan, Vietnam to Java, India to the Ottoman Empire, North Africa to continental Europe. In some places, merchants struck a crude new currency out of tin to enable monetary exchange to continue. But, put simply, the financial system broke down. The Ming emperors raced to cut costs, halting their ambitious building projects. But it was too little, too late. Soon even some of the richest parts of China were struggling to meet their obligations. In Europe, states debased currencies in a form of quantitative easing, to try to correct the mismatch between revenues and expenditure.

Last week’s devaluation, then, is not so much about exports or exchange rates, but an overheated system. The fundamental imbalance is not of supply and demand (which could be corrected by currency movements), but something more fundamental: a global economy where consumption is at saturation point. If history repeats, the paralysis that follows threatens something more profound than anything a central bank can deal with. Time to fasten our seatbelts.Cover of The Silk Roads: A New History of the World

• Peter Frankopan is director of the Centre for Byzantine Research at Oxford University. His new book, The Silk Roads: A New History of the World, is published by Bloomsbury on 27 August.

• For more on China, read our cover story: Why you should keep buying broken China.