Let me be very clear about this right up front: my opinion is that the only path to longterm growth for the Chinese economy lies in the development of a domestic market for China’s goods. But that isn’t the path on which China is embarked.
The official policy in China for economic reform has been one of gradualism for quite a few years now and there’s a very good reason for this. Were China to adopt a less gradual approach to economic reform things might take off at a pace and in a direction which they could no longer control. China’s leaders view stability (read: maintaining their hold on power) as of the very highest value.
It’s hard for most Americans to understand this but the gulf across which China’s leaders view the ordinary Chinese people is absolutely enormous. They view themselves as elite for perfectly good reasons: they are. I believe that China’s leaders are smarter, savvier, and tougher than ours. They had to be to prosper within the constraints of China’s culture, politics, and economic policy. My point in mentioning this is that I believe that China’s leadership will do whatever is necessary to maintain their hold on the country. Why not? They have little to lose and everything to gain.
James Fallows has an article, The $1.4 Trillion Dollar Question in the current Atlantic Monthly (hat tip: Mark Safranski) which is very well worth your time and attention. In the article Mr. Fallows outlines the complex mechanisms by which the Chinese leadership supports the U. S. economy and the reasons they’re doing so. The very best portion of the article is Fallows’s example of how U. S. dollars buy Chinese goods and come back to America again.
Let’s say you buy an Oral-B electric toothbrush for $30 at a CVS in the United States. I choose this example because I’ve seen a factory in China that probably made the toothbrush. Most of that $30 stays in America, with CVS, the distributors, and Oral-B itself. Eventually $3 or so—an average percentage for small consumer goods—makes its way back to southern China.
The company is paid by Oral-B in dollars; it must pay its workers in China’s currency, the ren min bi or RMB (people’s money). It exchanges its dollars for RMB at the local bank and the bank “surrenders&148; the dollars to the People’s Bank of China (PBOC) at the current rate of exchange.
The PBOC must give the dollars it piles up to the State Administration for Foreign Exchange (SAFE). SAFE mostly leaves the dollars “in the boring safety of U.S. Treasury notes”.
This is not an accident or a misjudgement on China’s part, despite the dwindling value of the dollar. The Chinese leadership is cannily trading Chinese-made goods for stability and gradual economic growth at home.
Were they to allow the RMB to rise relative to the dollar their goods would be less attractive to U.S. consumers. This, in turn, would result in lower employment and unrest in China. Further, were they to invest in something other than U. S. Treasury notes they would be risking two undesireable outcomes.
The first is a run on dollars. They hold a lot of them (remember those dollars piling up at the PBOC and the $1.4 trillion worth of Treasury note, denominated in dollars). There’s an old saying when you owe $100,000 to the bank, the bank owns you; but when you owe $100,000,000 to the bank, you own the bank. We owe $1.4 trillion to China.
The second is increased scrutiny of U. S.-China trade and China’s trading and monetary practices by the U. S. Congress.
Those of you who have some training in dynamic processes may recognize this system as a positive feedback loop. A positive feedback loop can only result in the destruction of the system which it governs.
