The article heavily criticized China’s central bank for selling China’s interests to the U.S.
Yu Yunhui, who holds a Ph.D. in economics from Xiamen University, is the author. He is not well-known. However, the article appeared in Qiushi, a prominent periodical on political theory that the Chinese Communist Party’s (CCP’s) Central Party School and the Central Committee publish. That, in itself, makes it worthy of attention and consideration.
The following is a translation of a majority of the article. The Chinascope editors do not analyze the author’s arguments, but leave it to the reader to do so.] [1]
After 30 years of reform and opening up, China is now in a danger zone where the U.S. and the U.S. dollar control the world economic order. The U.S. has started to use its “slaying the dragon” strategy against China. (The details can be found in William Engdhal’s book Target China: Washington’s “Dragon” Strategy). As “top-level design” has become a hot topic, we should ask: What is the highest level of China’s economy? What is its core? Who is in control of the highest level of China’s economy? Is China becoming a colony of international capital? When the members of the U.S. led Western group place their military and political focus on the Asia-Pacific region, are they trying to assist their fight for the control of the highest level of China’s economy? These questions are critical to the development of China’s economy.
I. The “Top-Level Power” and Its Internal Relationship to a Market Economy
In any market economy, a country’s economic “top-level power” is made up of three capabilities: the right to issue money, the right to set the exchange rate, and the right to set the price of assets. These three rights are inter-related. Together, they form a power system that determines the depth, width, and functions of a market system and sets the direction for the economy and the distribution of wealth.
The issuance of base money has a complicated impact on the exchange rate and the price of assets. At the same time, the exchange rate also determines the influx level of international hot money, the sufficiency of the base money’s supply, the rise and fall of capital for industries, and the ups and downs of the capital markets. Also, expanding or contracting the scale of stocks and bonds can influence the issuance of base money and the exchange rate. “Quantitative Easing (QE)” and “Directional Tightening” are done through financial markets and financial instruments.
The right to issue money is an element of national sovereignty. From looking at a government’s process of issuing money, whether it is to serve domestic enterprises and residents or foreign governments, enterprises, and citizens, one can tell whether the economy is autonomous or of a colonial nature.
The right to set exchange rate prices is also part of national sovereignty. From whether determining the exchange rate serves domestic capital and industries or foreign capital and industries and whether our own government controls the exchange rate or foreign governments or congress controls it, one can tell whether the economy is autonomous or is a foreign financial colony.
The right to set asset prices refers mainly to setting the prices on stocks, bonds, interest rates, and commodities. If a country’s right to issue money and its right to set the exchange rate price are controlled by a foreign government or foreign central bank, the right to set asset prices in that country must also be controlled by foreign financial groups.
If a foreign government and central bank and the foreign financial groups behind them control another country’s right to issue money, set exchange rates, and set asset prices, that country has also lost the right to distribute its national wealth, its control over its industrial development, and its right to regulate and control the macro economy.
II. The First “Top-Level Power”: The U.S. Government Controls the Exchange Rate Pricing
When China changed its economic model from a planned economy to a market economy, China’s economic “top-level power” changed from the right to plan production, the right to distribute goods, and the right to set the price of goods to the right to issue money, the right to set the renminbi exchange rate, and the right to set renminbi asset prices. The agency that determines the fate of China’s economy changed from the State Development Planning Commission (SDPC) to China’s central bank.
However, if the U.S. manipulates China’s central bank’s money supply and the fluctuation of the renminbi’s exchange rate, then, in fact, the U.S. controls China’s economy. Whose fault is it? China’s central bank. The central bank’s faulty currency policy and exchange policy over the past ten years has caused the plight of China’s economy and has resulted in handing the “top-level power” over to the U.S. and the dollar.
For any sovereign state to be independent, the state itself must control its economic “top-level power.” For example, will the U.S. let China, Japan, or the European Union decide its QE policy, its exchange rate, the interest rate on the dollar, and the price of what’s listed on its stock markets? Definitely not. The U.S. decides these policies based on its own needs and will not take any criticism from other countries.
Even Japan, though under U.S. military protection, still controls its own economic “top-level power.” When the U.S. adopted the QE policy, Japan immediately initiated its “Extraordinary Quantitative Easing” policy so as to cause a rapid depreciation of the Yen. At the same time, it increased its stock market prices in order to prevent the newly tainted dollar from looting Japan’s own wealth.
However, the way China has acted is completely different.
From the moment that China adopted exchange rate reform in July 2005, it has let the U.S. government and Congress firmly control the renminbi exchange rate. China’s so-called “managed floating exchange rate” turned into a predictable, continuously appreciating exchange rate based on a policy that the U.S. government, Congress, and the international capital behind them actually controlled. The pressure from the U.S. government and Congress determined the renminbi’s pricing and the pace of its appreciation. The renminbi rose in value as the exchange rate changed. It went from 8.11 yuan per dollar to the current 6.20 yuan. In this predictable appreciation period, the U.S. Federal Reserve opened the gate of the tainted dollar, making China’s foreign reserve increase five-fold, from US$609 billion in 2004 to the present value of US$3.4 trillion.
The continuous appreciation of the renminbi attracted a large amount of overseas hot money into China, causing China to issue a large amount of base money into the market, thus diluting the renminbi holder’s purchasing power in China’s domestic market and building up the pressure of inflation. The huge dollar influx was changed into renminbi, which then bought renminbi assets that provided high-return and also enjoyed the benefit of the renminbi’s appreciation over the dollar. At the same time, China invested its foreign reserves in low-return assets in the U.S., such as U.S. treasuries bills and bonds from Fannie Mae and Freddie Mac. The net result has been a loss of profit and an outflow of wealth.
Renminbi appreciation severely hurts domestic entities’ competitiveness and boosts the competitiveness of global conglomerates’ Chinese subsidiaries. It helps multinational companies to export their parts and accessories to China at a low cost. It also has resulted in the bankruptcy of many export-oriented businesses and many bad loans in domestic banks. Manufacturing companies have been squeezed: they lack the cost advantage that multinational companies have in the domestic market and also bear the pricing pressure as a result of the renminbi’s appreciation in the international market. In the end, domestic capital has withdrawn from the real economy and been diverted to real estate and other speculative fields, building up a huge real estate bubble.
As the real economy lacks growth, unsustainable land sales have thus become the main source for local governments to generate income. Local governments use the land sale income as a guaranty to borrow substantial sums of money. Since officials are appointed for a term, their performance evaluation is based on the [local government’s] economic performance in that term. There is a huge grey income chain from construction projects. All these have made local governments borrow money crazily. Local officials only care about whether they can get money during their term and don’t care about what disaster they will leave to their successors. Thus society’s resources are not distributed correctly and an economic recession can occur at any time.
China’s economy got into trouble when the exchange rate reform started. Though our soldiers safeguarded the defense line, the financial and economic elites opened the door to international financial robbers; they called it “opening up,” “connecting to the international system,” “preparing for economic globalization,” and “capital project liberalization.” The U.S. government and Congress used faulty reasoning about the trade deficit to force the renminbi to keep appreciating. China’s government agencies that supervise the economy didn’t come up with a series of actions with which to fight to regain the right to set the renminbi’s exchange rate. These might have included foreign capital, foreign trade, the industrial structure, and taxation. Instead, the central bank gave the renminbi’s appreciation as a gift to U.S. politicians and the Sino-U.S. strategic dialogue. The U.S. used the “currency manipulator” label to scare away China’s financial soldiers. The U.S. controls the renminbi exchange rate. It further uses that power to support the influx of hot money and directly impact China’s money supply, interest rate, stock prices, and other asset pricing.
The renminbi appreciation policy, which in spirit contracts the economy, and the macro policy to expand and stimulate the development of towns contradict each other. This shows that China’s economic policy designers don’t understand the meaning and function of the exchange rate; nor do they understand the impact of losing power over it.
The exchange rate is not a conventional weapon in the economic or financial area. It is a nuclear weapon that can destroy a whole nation. That’s the real reason that the U.S. government and Congress closely watch the renminbi’s exchange rate and keep applying pressure. When the U.S. labels China an “exchange rate manipulator,” it is not just to weaken China’s export capability and jeopardize China’s economic security; it is also to make the renminbi a global currency and force China to open its capital market, removing the obstacles for Wall Street tycoons and other foreign capital to enter China’s market. (Details can be found in Zhang Fangyuan’s The Chinese Nation Is at Its Most Dangerous Point – a Review of William Engdhal’s New Book [2]).
Unfortunately, China’s financial elites and theorists have not realized that the exchange rate is part of our national sovereignty and is the button for nuclear war in the economic financial field. They haven’t realized that China’s macroeconomic problem originated with the loss of control over the exchange rate.
III. The Second “Top-Level Power”: The Federal Reserve Controls the Right to Issue Base Money
When money was no longer tied to gold, it got a new function: dilute savings and loot wealth. The dollar, with the function of being an international currency reserve and unlinked to gold, has the power to dilute global savings and loot global wealth.
The dollar, as a weapon the U.S. uses to initiate financial attacks and loot the world’s wealth, is one of the three magic weapons that the U.S. uses to control the world. The other two are its technological power and its military power. The U.S. tightly controls high-tech exports, but it tries everything to let the U.S. dollar flood the world. In China, the dollar is the “softest” weapon where everyone loves it; it is also the “hardest” weapon as it has unlimited power to control the issuance of China’s base money.
Among the 25 trillion yuan (US$4 trillion) of “high-powered money,” or base money, that the central bank issued, over 20 trillion yuan was based on the dollar reserve. That means China only issued 5 trillion yuan for non-dollar reasons. In 2010, 94 percent of newly added renminbi base money was due to the influx of the dollar. Is China still a country that has autonomy over its own financial system, economy, and policies? The answer is “No.”
The U.S.-controlled renminbi based money issuance mechanism, under China’s central bank’s market operations, has become a huge damaging force to China’s economy. Because of the complex financial system, many special terms, and hidden operations, the U.S. is able to hide its involvement in China’s policy making. China’s central bank and its subsidiary, the State Administration of Foreign Exchange, are the culprits.
Since the central bank adopts a renminbi appreciation policy, international hot money keeps flowing into China. This causes the equivalent amount of renminbi to flow into China’s domestic market. The central bank takes the dollar and gives the renminbi to the dollar holder; the dollar holder invests renminbi in China, causing an increase in the money supply in China; the central bank then increases the Reserve Requirement Ratio (RRR) and issues treasury bills to control the money supply; this results in lowering commercial banks’ lending capacity, reducing domestic companies’ cash flows, and increasing interest rates on loans from domestic banks and private parties.
Looking at the whole cycle of the operation of issuing money and taking it back, one can find that, in essence, the central bank takes back the money from domestic businesses that are in need of money for their business operations and hands it over to the dollar holders, so that the dollar holders can make a profit in China. The money coming from investing in dollars is, in its nature, a type of lending that squeezes the domestic lending market, thus making it harder for domestic companies to obtain loans.
The central bank’s policy over the past ten years can be generalized as “ten years of a combination of easing and tightening.” That is, it has adopted the easing policy to let international hot money flood China; it has to use the tightening policy on domestic capital and small and mid-sized companies. This explains why the more foreign money comes into China, the tighter the amount of capital that is available for domestic companies, the higher the interest rate they can get when making private loans, and the less competitive these loans are. As the U.S. dominates the issuance of renminbi, domestic companies are left with only a few choices: invite the foreign wolves in and share the ownership with them; issue stock in a foreign stock market to raise capital; deplete their capital and wait for foreign capital to buy them; try to avoid paying their debt back; or declare bankruptcy.
Base money is “strong money” or “high-powered money.” In the repeated cycles of “trade – come back in savings and then be lent out – trade again – come back in as savings and then be lent out again,” it plays a multiplier effect. However, the central bank has missed this secret behind the multiplier.
In economic activities, the first enterprise that obtains the base money from the central bank is likely to be the first one to grasp a good business opportunity and make a super profit. On the other hand, the last one in the cycle to receive a loan from the bank has no business opportunity left for itself and just works for the bank [struggling to make some money to pay back the bank loan and make a little profit]. Therefore, the base money’s value as “high-powered money” reflects not only on its ability to generate money, but also the ability to generate a super profit.
Therefore, in a sovereign country, the person or organization who can obtain the base money has the advantage of being able to take the best business opportunities and receive the largest profits. During the period when the dollar controlled 90 percent of the issuance of China’s base money, the dollar holders had over 90 percent of the best business opportunities. Of the 25 trillion yuan that China’s central bank has issued, the dollar holders have taken over 20 trillion yuan in base money. This means that since the 1990s foreign capital has controlled the majority of China’s business opportunities and super profits. Chinese companies can only be foreign capital’s follower. Isn’t this the reality of China’s economy today?
If the central bank’s officials pay more attention to domestic companies and less to foreign companies, they will see the public’s concerns: money is worth less and less, but companies’ capital has become tighter and tighter and interest rates grow higher and higher. Thus it becomes harder and harder for local businesses to survive. Foreign capital takes away the super profits while the domestic companies struggle to survive. These are all the results of surrendering the right to issue base money to the U.S. and the dollar.
IV. The Third “Top-Level Power”: Foreign Capital and Their Media Have the Right to Set Asset Prices
China’s financial supervision agencies have yet to fully understand the concept of China’s economic “top level power system”; nor have they realized the danger of losing that power. Therefore, they often trade the country’s top-level power and core interests with foreign entities, in exchange for an individual agency’s achievements, personal gain, or medals and applause from Wall Street.
After Russia joined the WTO, it published a clear regulation prohibiting foreign institutions from holding shares in Russian banks and foreign banks or financial institutions from setting up offices in Russia. It thus kept greedy international financial capital outside the country and maintained its own independence and autonomy. China, on the contrary, has foreign capital and institutions in every financial field, including banking, insurance, stock, commodities, funds, trusts, rentals, guarantees, audits, and credit ratings. At the top level of China’s economy, overseas financial forces control the right to issue money, set exchange rates, and set asset prices. At the bottom-level, overseas financial forces either infiltrate or control China’s financial institutions, financial channels, media platforms, and key customers. They control China from top to bottom.
Among the economic “high-level powers” of a sovereign state, there are complex, bi-directional, or even multi-dimensional impacts and checks and balances. When the dollar sets the trend of the renminbi’s exchange rate, dominates the amount of money that China’s central banks can issue and the direction in which the money flows, and has access to China’s stock, debt, capital, real estate, and commodity markets, the dollar directly or indirectly controls the renminbi asset pricing, the direction of its fluctuation, and its range.
In a broad sense, renminbi asset pricing includes the price of stock, bonds, capital (e.g. interest rates on bank loans and private loans), real estate, and other assets.
The interest rate is the price of capital. It is a main factor in determining the product cost and the price of other production factors. It is also a main vehicle for macro control. However, the assault of enormous dollars destroyed the lever of the interest rate. That is because the oversupply of base money creates the pressure of inflation. If the central bank increases the interest rate to combat inflation, it will attract more foreign money. Therefore, the central bank has to keep the interest rate stable and low. This results in an effective negative rate. It is also a sacrifice for domestic depositors. On the other hand, the central bank has to raise the RRR and issue treasury bills to tighten the money lending scale. This creates a hard time for both well-performing and poorly-performing companies. In fact, every macro economy tightening is an opportunity for foreign companies to defeat domestic companies.
This is the root cause for small and mid-sized companies hardly being able to survive in China.
However, the economic logic does not stop there. After the central bank gave up using the interest rate as a macro control instrument and switched to RRR, commercial banks could offer fewer loans, and thus private loans flooded China. This arbitrage opportunity brought more overseas hot money into China. The results of the macro-control in the past ten years are: hot money keeps flooding China, RRR remains high, the interest rate on private loans keeps climbing, companies conducting real business have little profit or declare bankruptcy, the stock market remains low, IPOs have stopped, real estate has become a bubble, and the economy as a whole has deteriorated. This is the reality of China’s macro economy after losing the right to set interest rates.
Stock and bond pricing is a main component of capital asset pricing. For many years, the central bank and the Securities Regulatory Commission (SRC) have adopted bad policies that give away the right to fix asset prices and have greatly weakened China’s economic power. On the one hand, the central bank tightens domestic banks’ lending due to the dollar’s influx in China. This causes market anxiety, a slide in the price of A-shares (the main stock type for companies to be traded in China’s stock market), a halt to IPOs, and a dysfunctional capital market where companies cannot raise capital. Many companies that perform well are forced to list themselves on overseas security exchanges. The right to set stock price for these companies is given to foreign capital.
On the other hand, to prevent China’s stock market from going too low and causing social problems, the SRC expands the quota on Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) and organizes Chinas’ security exchange to go abroad to invite foreign capital to buy Chinese stocks at their bottom price. As a result, China’s assets are sold at a low price to overseas investors, causing a loss in wealth and giving foreign capital strong powers and control of China’s capital market.
From another angle, an obvious conflict exists between the central bank’s policy and the SRC’s policy. For example, the central bank pushes the renminbi to be a global currency, but when the renminbi was traded in Hong Kong and was about to go overseas, the SRC used the RQFII policy to bring it back to save China’s stock market. The renminbi was taken back home before it had a chance to go overseas. However, the difference this time is that foreign investors own the returning renminbi.
Like the Commerce Ministry, the SRC is interested in bringing foreign money into China. This is in conflict with the central bank’s policy. When the hot money is already in influx, the SRC’s increasing the QFII quota undoubtedly adds more pressure on central bank’s foreign reserve. When the QFII dollars were changed into Renminbi, the central bank immediately issued Treasury bills or increased RRR to tighten the commercial bank’s lending scale. This hurt the real economy and caused a drop in the capital market. Then the SRC had to attract more foreign capital into China. This has caused a vicious cycle, in which the overseas capital keeps coming into China and increasingly controls China’s capital market.
When the domestic institutional investors don’t look at the central bank’s monetary policy any longer, but at the U.S. Federal Reserve’s garbage dollar easing policy; when what the domestic individual investors rely on is no longer information from domestic funds and brokerage firms but the information from Merrill Lynch, Morgan Stanley, MSCI, and other international index creating companies; when foreign financial institutes’ research reports and news releases can control China’s domestic stock prices; when the SRC’s spokesperson starts quoting the QFII buying China’s stock as proof that the stock market has reached its bottom, the capital market’s pricing right and discourse power, which are part of China’s economic “top-level power,” have already fallen into the hands of overseas capital.
V. Conclusion
From the analysis of economic “top-level power” one can find many critical problems in China’s economy. The key to solving these problems is to take back control of China’s economic “top-level power.” To make the “China Dream” come true, we must recapture the “top-level power” and make it serve China’s modernization.
Endnotes:
[1] Qiushi Theory Online, “Who Controls the ‘Top-Level Power’ of China’s Economy?” May 31, 2013.
http://www.qstheory.cn/lg/clzt/201305/t20130531_235821.htm.
[2] Strait Commentary, Issue number 269, May 1, 2013