What caused China to make those moves? Having benefited from the neoliberalism, China has had a booming export industry for several decades. The Americans bought Chinese goods and paid with U.S. dollars. China normally needs to exchange the U.S. dollars for the Chinese yuan in its domestic use. When the trading deficit is becoming huge between China and America, China neither supplied enough its currency by importing goods from America nor appreciated the exchange rate of its currency in the currency exchange market. Thus, with low exchange rate to the U.S. dollar and high savings rate in its domestic money, China keeps a strong competency in its exporting trade. To stem the pressure of appreciation on the Chinese yuan, the Chinese government diverts the excess inflowing U.S. dollars to buy the U.S. Treasuries. The consequence is that China possesses nearly $2 trillion of the U.S. Treasuries, compared to $8.3 trillion U.S. M2 money supply. This is one reason some economists believe that China is a currency manipulation country, though American authority does not think so in public. This is one reason some economists believe that China holds some responsibility for this financial crisis in 2008 because China hoards too much money; yet money in this modern globalized world is called currency, and money must mobilize like a current so that the financial market will not lack its liquidity.
While America is entering this economic downturn, the Americans do not need Chinese goods as much as before. It causes a decline in China’s export to America and a decrease in the U.S. dollars inflows into China. It seems China need not have to buy the U.S. Treasuries to keep the Chinese yuan low like it did before, but the reality is not. China has to continue buying the U.S. Treasuries for a while. There is a saying that when a person owes a bank $100, that is a personal problem; but when a person owes a bank $100 million, that is the banker’s problem. The U.S. dollar is a fiat money, which is a paper money authorized by a government and based on faith not on gold. To maintain a fiat money, a government makes payment by taxation. In the near future, without taxation hikes but spending goes on, the U.S. dollar will be under pressure of depreciation. Now, it is in China’s interest to keep buying the U.S. Treasuries in order to avoid Chinese assets in America losing its value.
But the Chinese government wants the American government to guarantee the safety of its assets in America, and the American government re-assures its safety. The problem is that there is an “invisible hand” in a market, according to Adam Smith (1723 – 1790, founder of the classical liberalism). After having seen that the American government is unwilling to assure some big American companies, the Chinese government feels the boat is now too big to sail. Naturally it starts getting anxious and tries to grope every possible option to get rid of this so-called U.S. Treasuries trap. China increases gold reserves, but the entire current amount of gold in the world is less than $4.5 trillion, far from a mean for a new “super-sovereign reserve currency”. China proposes to materialize the Special Drawing Rights (SDR) of the International Monetary Fund (IMF). However, SDR is an ersatz currency with very small capacity ($39.1 billion original plus $250 billion new issues by G-20 in 2009), and it is not practical to make it as a “super-sovereign reserve currency” right now even though it is supposed for every member of IMF in the future. China turns to the BRIC states and hopes these new emerging forces form a new monetary coalition, but this kind of ally could be far from a success, for there is lack of mutual trusts among them; many of them were long-time foes in history. China starts to reduce buying the U.S. Treasuries, but they must keep buying to prevent its assets from losing value. Only China has hoarded huge money in both global and domestic, despite much less U.S. dollar inflow into China. China plans to buy the made in China; China’s export is shrinking, and China never has imported an equivalent amount goods from America before. Now, many Chinese goods that used to be bought by foreigners must be bought by the Chinese, themselves.
Many Chinese feel their government is heroically challenging the financial hegemon of the U.S. dollar. They are talking about G-2 avidly instead of G-20 as if they were already seeing that their G-1 era is near. The U.S. dollar, like any other fiat moneys, including the Chinese yuan, is based on faith; there is no hegemony in U.S. dollar essentially. When the Chinese abandon their faith on the U.S. dollar, it is their choice and a free choice for all. In fact, the Chinese did abandon their faith on their own fiat money in late of 1940s. Faith is based on each free agent, not forced by Americans. In truth, the U.S. dollar is not the only international reserve currency; it has never been before and never will be. It is a fallacy to blame the U.S. dollar for this virtual frozen status of the Chinese assets in America. It is not a sanction under the American government, and it is mismanagement under the Chinese government. Adam Smith understood this American fiat currency deeply. In his An Inquiry into the Nature and Causes of the Wealth of Nations, Smith wrote that:
The Americans, it has been said, indeed, have no gold or silver money; the interior commerce of the country being carried on by a paper currency, and the gold and silver which occasionally come among them being all sent to Great Britain in return for the commodities which they receive from us. But without gold and silver, it is added, there is no possibility of paying taxes [to Great Britain]. We already get all the gold and silver which they have. How is it possible to draw from them what they have not?It appears to me that the depreciation of the U.S. dollar is an inevitable choice, for it is “convenient for them [Americans]” to recover American economy. Perhaps the Chinese are tilting at windmills or chasing a ghost in their showdown with the U.S. dollar. The Chinese actually should think about: why did China make its fortunes in America but not in the other BRIC states? Why does only China have this grave suffering with the U.S. dollar among the BRIC states? Why can the other three of BRIC states be democratic, but not China?
The present scarcity of gold and silver money in America is not the effect of the poverty of that country, or of the inability of the people there to purchase those metals. In a country where the wages of labour are so much higher, and the price of provisions so much lower than in England, the greater part of the people must surely have wherewithal to purchase a greater quantity if it were either necessary or convenient for them to do so. The scarcity of those metals, therefore, must be the effect of choice, and not of necessity.
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