Three asian girls shopping. Photo: iStock

The western hope that engagement with China would inevitably bring about political liberalization was always premature. It spoke of a glaring ignorance regarding the sources of Sinic achievements. For the entire West, the sources of capitalism were always indissolubility tied to an ethos of individualism. This meant that there were ethical sources underwriting the drive to autonomy that is today’s secular world.

Underlying the moral sources of the West’s political achievement in liberty rests theology. These twin reserves have no indigenous home in Asia.

To understand the current transformation of China’s economy, we examine the Asian powerhouse’s falling current account surplus. The current account isn’t accounting fiction, it’s a real measure of one component of China’s balance of payments with other nations.  Underneath both the capital/current account is an indigenous culture that more kindly resembles an island than a dominant Eurasian landmass.

Understanding the impact geography has had on Chinese relations and its concomitant rise is vital if the West is to understand the limitations political liberalization has in China

Understanding the impact geography has had on Chinese relations and its concomitant rise is vital if the West is to understand the limitations political liberalization has in China.

The export-based pillar of China’s political economy is changing fast and this will have profound fiscal consequences for both the status of the dollar as a reserve currency, monetary credit expansion in the US and capital flows into DC.  By moving towards the taxation of consumption, Beijing is securing a firm reservoir closed off from external shock.

The past 10 years have witnessed a drop in China’s external imbalances. A decade ago, China was the source of US credit expansion into housing. Currency depreciation was the least worrying part of the portfolio arrangement of its economic imbalances. China was selling to the world and buying nearly nothing. In 2007, its current account surplus was 10% of its GDP. It has witnessed a firm, steady decline since then. That massive surplus found a home in US Treasury bonds that underwrote the 2008 housing crisis.

China’s rebalancing began immediately after 2007. Team Trump deliberately ignores the favorable position China is emerging into despite the bond-related crises that have enveloped Beijing. Going forward, the IMF predicts that by 2023, China’s rebalancing into a consumption-based polity will engender broad support for new domestic constituencies that will steer Beijing’s political class toward market-based management. Politically and socially, this isn’t the fraught prospect that often accompanies western punditry toward China’s rebalancing.

Going forward, why does the US trade deficit with China remain large?The answer is discovered in accessing the role played in global supply chains. This means that China’s role as a final destination for assembled goods is ending. It also means that the United States needs to re-examine a very dangerous reality; namely that as China rebalances toward consumption, the American trade deficit will chiefly be explained by US domestic policies.

China’s use of forced joint ventures will probably continue. However, drawing on more foreign direct investment will help bring profound stability for both the yuan and the central bank’s management of rebalancing. This means a new ethos of professionalism should be openly sought by Beijing as it seeks to reposition itself into a predominantly consumption-based polity.

Moving forward, both the US and China will continue to be dominated by domestic political ends. As the volatility ignites the social, political bases of both nations, its political base must reconfigure itself to resemble republican aims. That means linking tax revenue to political interests that serve to strengthen the Chinese national polity.  It means safety nets in the form of healthcare and pensions, bond markets that function because they are openly harnessed to markets, not political classes.

The dominant position of team Trump going forward should be to assist Beijing in the rebalancing by openly identifying reformers close to President Xi Jinping.

The canard that the opening of China would lead to political liberalization has failed. We’re in the opening gambit to see how best the US can assist China in rebalancing its polity toward consumption.  And the best place to source this confrontation is by managing the informing social, political, technological, monetary components of China’s current and capital account.

William Holland

William Holland is North American recruiter for Wikistrat global consultancy monitoring Pakistan's nuclear program.

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