It is typical for political leadership to seek stabilizing efforts when trends become overwhelming. This was primarily the reason for the recent fourth plenary meeting between Xi Jinping and his cohorts. The meeting procured nothing new; instead, this session demonstrated that the Chinese leadership is stuck chasing events. This is evidenced in China’s economic and financial indices.
For the leadership to halt the flow of destabilizing trends, Xi should pursue monetary reform that would enshrine the internationalization of the renminbi. Because this is a political act, it would offset dangerously inept financial and economic trends that will continue to whipsaw Beijing.
For China to embody the ideals envisaged by Xi Jinping, it must become an innovative economy. This means it must overcome the middle income trap. It is indicative that the ethics of statesmanship precede any accompanying vision of economic greatness. Get the ethics right and the rest will follow. For China’s leadership, this means that a plenary session would seek to clarify broad policy trends alleviating the present crisis, and not merely seek consensus to preserve the status quo.
China can become a great economic leader, but the yuan will never achieve the status of a reserve currency abroad if Beijing maintains both capital controls and exchange-rate rigidity. The past two months alone should have fortified the leadership about the prerequisite of monetary reform. Instead, Beijing pursued a populist agenda of reducing its US Treasury holdings, whose impact was an appreciating dollar matching Chinese capital flight and devaluation.
Why doesn’t Beijing acknowledge that misguided capital controls cannot prevent flights of capital nor the strengthening of its financial account? Any look at China’s published data regarding its recent imbalances in money-supply growth and domestic bailouts reveals that China has a difficult dollar shortage that will never be resolved by keeping archaic policies of currency-capital intervention. It was at this plenary session that the Chinese leadership should have pursued monetary reform to the effect of increasing the usage of the yuan internationally. As of this writing, according to the Bank for International Settlements, the yuan is used in barely 4% of global transactions, identical to the Swiss franc or the Australian dollar.
Second, China’s currency devaluation reveals that its financial and monetary accounts are overstretched. China has gone from needing two units of debt to the creation of one unit of GDP. Now it requires 6.75 units of debt to generate identical growth.
The underlying problem is that China’s central bank has pursued an aggressive monetary policy identical to the United States’ without possessing the dynamism, financial account or capital freedom that characterize the US and other First World political economies.
A plenary session devoted to securing Chinese dominance would have sought banking and monetary polices that reflect sound money, not the multiplication of mistakes that characterize crazed autocrats.
Sound monetary policy would have resulted in massive capital inflows, the very prerequisites needed to transition any political economy from state-owned low productivity to a service-and technology-led powerhouse. Instead, China’s leadership has sought capital controls that have weakened its domestic financial system, making it difficult for the yuan to become internationalized. Instead of seeking to dethrone the dollar, Chinese leadership has turned inward. Beijing is paralyzed.
How does one characterize China’s biggest weakness, especially regarding the trade war? China cannot win a trade war with incessantly high debt, capital controls and dependency on US markets. The plenary session should have openly sought to renew Chinese efforts to supplant American dominance. It didn’t, because Beijing’s leadership is incapacitated.
China’s current leadership has turned inward; it is now too late to address the domestic imbalances of overcapacity and incessantly high debt to offset with sound money.
Beijing needs a strong currency that favorably underwrites the purchasing power of wages and domestic savings, especially in a country like China that underestimates inflation indices. It needs sound money and newly structured capital markets that would serve to internationalize the yuan.
This would be a framework to begin alleviating the pain of rebalancing from a mercantile regime. Its not going to happen, because the posture of Beijing’s governing class is permanently archaic and self-serving.