The recent round of high intensity monetary tightening policies is bringing significant risks to China’s economy.
One of the danger indicators is the frequency at which small-to-mid sized businesses in Wenzhou are skipping debt payments. If allowed to continue, this would likely become the first domino, leading to the bankruptcy of high-interest loan and micro loan companies, increasing local government’s debt, and eventually undermining the operations of major banks.
These problems can easily become the perfect excuses for investors to “short sell China”. Next, international financial organizations, ratings agencies and foreign governments will put even more pressure on China, driving its economy beyond redemption.
More and more people are recognizing the dangers of such excessive monetary tightening, and some economists at the International Monetary Fund are calling for a return to more neutral monetary policies.
Americans, however, don’t see the same. The U.S. Senate on October 11 passed a bill that targets the yuan, which the U.S. claimed is undervalued to make China’s exports to the U.S. cheaper. Sponsors of the bill claim it is intended to reduce the alleged trade imbalance between the two countries and create more jobs for Americans.
What does the yuan’s appreciation mean? General economic principles provide that a currency appreciates through tighter monetary policies, such as increasing interest rate and minimum bank reserves. Through the new bill, the U.S. deems China a “currency manipulator”. And if China refuses to implement even more monetary tightening policies, the U.S. can invoke a series of sanction clauses in the currency bill to impose higher tariffs on goods imported from China. This will further endanger export-centric companies like those in Wenzhou. Some already hurting may not survive.
Yet this could very well be the bill’s real intention. In all the talks from American politicians about providing more jobs, the manufacturing sector in the U.S. has been a focal point. And all the discussions and debates lead to one conclusion: Without the fall of China’s manufacturing sector, American’s manufacturing industry has little chance to revive.
However, under tight control by its financial groups and energy companies, can the American manufacturing sector regain its past prominence? Do those leaders really want it? Are Americans willing to produce general consumer goods like shoes, socks, hats, shirts and home appliances?
If that is the case, then there must be major restructuring of the world’s economies, with the global division of labor reverting back 30 years. That, of course, is almost impossible. Therefore, the new currency bill passed by the U.S. Senate is nothing more than a way to shift the burden of its internal financial struggles onto China.
The scheme has been in preparation for three years. The first step was for billionaire investors such as George Soros to gain a foothold in Hong Kong. Next, their investment firms forced the appreciation of the yuan and later called for the currency’s internationalization. Then the three major ratings agencies repeatedly warned of risks investing in China. These plots were designed to bury the financial landmines before pushing China toward their direction. Wenzhou was the first step, and no matter where the next market crisis occurs, it will eventually extend from manufacturing sector to the banks. The consequences are too ghastly to contemplate.
So how should China respond? The most urgent measure should be redesigning the methods that formulate exchange rates. The value of the yuan must be based on that of the commodity. It should be manufacturing-based, rather than depending on investments and monetary stability. The traditional economics textbooks do not apply to the Chinese economy at all. If China continues to push for letting the market freely decide the value of the yuan, the economy will inevitably suffer crippling consequences.
Even more frightening is that some of the famous Chinese scholars do not recognize these pitfalls. They even suggest that the U.S. Senate’s move came at a time when the U.S. dollar is showing signs of improvement, which brings increased pressure to the country’s exports and economic recovery. They think the continued rise in China’s trade surplus with the U.S. is the result for the decline of the U.S. employment rate. They have apparently agreed to the reasons that the U.S. should put sanctions on China.
(Author: Executive Editor of the Securities Information Channel of CCTV)