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America’s ‘plan’ to destabilize China

http://www.jamaicaobserver.com/columns/America-s–plan–to-destabilise-China

IN early October, China’s Premier Wen Jiabao addressed European leaders in Brussels. Ominous talk of currency wars dominated the proceedings. And why not? After all, America – and a growing coalition of forces – has mounted a massive attack on China. And the American-led coalition’s weapon of choice is the renminbi-US dollar exchange rate. According to America’s war “plan,” a maxi appreciation of the RMB against the greenback will generate economic instability in China. This will rein in the hegemon.

Premier Wen had good reasons to be worried and to warn the assembled in Brussels that a maxi renminbi appreciation would destabilise China and be “a disaster for the world”.

The rhetoric coming from Washington fails to mention weapons and war plans. Instead, the airwaves are filled with a never-ending stream of nonsense about how a maxi renminbi appreciation is designed to help the Chinese and to make the world safe from global imbalances. Not surprisingly, Washington’s line bears no relation to the facts – not even the relationship which is implied by an ordinary lie.

This isn’t the first time America has used currency as a secret weapon to destabilise China. In the early 1930s, China was still on the silver standard and the United States was not. Accordingly, the Chinese yuan-US dollar exchange rate was determined by the US dollar price of silver.

During his first term, President Franklin D Roosevelt delivered on his Chinese currency stabilisation “plan.” It was wrapped in the guise of doing something to help US silver producers and, of course, the Chinese.

Using the authority granted by the Thomas Amendment of 1933 and the Silver Purchase Act of 1934, the Roosevelt Administration bought silver. This, in addition to bullish rumours about US silver policies, helped push the price of silver up by 128 per cent (calculated as an annual average) in the 1932-35 period.

Bizarre arguments contributed mightily to the agitation for high silver prices. One centred on the fact that China was on the silver standard. Silver interests asserted that higher silver prices – which would bring with them an appreciation of the yuan against the US dollar – would benefit the Chinese by increasing their purchasing power.

As a special committee of the US Senate reported in 1932: “Silver is the measure of their wealth and purchasing power; it serves as a reserve, their bank account. This is wealth that enables such peoples to purchase our exports.”

Things didn’t work as Washington advertised. It worked as “planned,” however. As the dollar price of silver shot up, the yuan appreciated against the dollar. In consequence, China was thrown into the jaws of the Great Depression. In the 1932-34 period, China’s gross domestic product fell by 26 per cent and wholesale prices in the capital city, Nanjing, fell by 20 per cent.

In an attempt to secure relief from the economic hardships imposed by US silver policies, China sought modifications in the US Treasury’s silverpurchase programme. But its pleas fell on deaf ears. After many evasive replies, the Roosevelt Administration finally indicated on October 12, 1934 that it was merely carrying out a policy mandated by the US Congress.

Realising that all hope was lost, China was forced to effectively abandon the silver standard on October 14, 1934, though an official statement was postponed until November 3, 1935. This spelt the beginning of the end for Chiang Kai-shek’s Nationalist government. America’s “plan” worked like a charm – Chinese monetary chaos ensued. This gave the communists an opening that they exploited – one that contributed mightily to their overthrow of the Nationalists.

Ironically, now the shoe is on the other foot. As was the case in the 1930s, Washington does not have a war plan, or even the idea of a plan, nor do I believe it knows the meaning of the word “plan”. That said, if Beijing caves in to Washington’s current demands for a renminbi appreciation, the result is totally predictable. A Chinese upheaval and a world disaster will ensue.

Fortunately, Premier Wen has studied the data. Since China embraced Deng Xiaoping’s reforms on 22 December 1978, China has experimented with different exchange-rate regimes. Until 1994, the renminbi was in an everdepreciating phase against the US dollar. Relative volatile readings for China’s GDP growth and inflation rate were encountered during this phase (see the accompanying chart and table). After the maxi renminbi depreciation of 1994 and until 2005, exchange-rate fixity was the order of the day, with little movement in the RMB/USD rate. In consequence, the volatility of China’s GDP and inflation rate declined, and with the renminbi firmly anchored to the US dollar, China’s inflation rates began to shadow those in America. Then, China entered a gradual renminbi appreciation phase (when the RMB/USD rate declined in the 2005-08 period). Without a firm dollar anchor, China’s inflation rate picked up, relative to the US inflation rate. And, yes, the volatility of China’s GDP picked up and China’s average inflation rate rose, too.

In addition to letting the data “talk”, Premier Wen must be also listening to the echoes of Karl Schiller, German Finance Minister between 1966 and 1972, who pithily said: “Stability is not everything, but without stability, everything is nothing.” Let’s hope he keeps listening.

The above is reprinted from the November 2010 Globe Asia newspaper.

Steve H Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, DC.

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  1. SilentChinese
    January 10th, 2011 at 06:56 | #1

    words from a wise man.

  2. January 10th, 2011 at 11:00 | #2

    I don’t think Steve Hanke is correct though.

    If America “plans” to destabilize China, there are many more simpler and more direct ways to do it. One is to withdraw all U.S. investments in China and to procure all manufacturing through another poor country.

    The better way to characterize the relationship is one of cooperatition:

    Opinion: Keeping a cool view of the U.S.-China Cooperatition

    This is the same behavior of the U.S. even with her “allies.”

    Remember, Chiang Kai-shek was America’s ally against Communism. The better explanation was Chiang and China was more of an afterthought. U.S. looked after her interests foremost to fight the depression.

    Regarding his “link” to China’s GDP volatility and inflation to the RMB-USD peg, I think it is very weak. The peg is one of many factors which impacts China’s GDP growth.

    China’s policies will be of her own; she does not need to be forever intertwined with the USD as if riding something magical about the American currency to save her own economy.

    On the point which I agree with Professor Hanke:

    In addition to letting the data “talk”, Premier Wen must be also listening to the echoes of Karl Schiller, German Finance Minister between 1966 and 1972, who pithily said: “Stability is not everything, but without stability, everything is nothing.” Let’s hope he keeps listening.

    Chinese leaders will achieve this in ALL scenarios – when the U.S. prints USD as if there is no tomorrow or when the U.S. raises interest rate from 0% to 50%.

  3. Charles Liu
    January 10th, 2011 at 11:45 | #3

    Here’s an article by William Engdhal on geopolitical significance of Liu Xiaobo’s Nobel:

    The Geopolitical Agenda behind the 2010 Nobel Peace Prize

    To me, Carl Gershman and NED’s rebranded anit-communist agenda is obvious – dump money on anyone who will help us pressure the Chinese government. But it’s short-sighted and exteremely misguided. Even if we manage to stir up dissent to cripple or overthrow the Chinese government, what will the democratic China look like when it’s run according to Tibet independent activist, religious nut jobs who’s only attachment is a wheel in the tummy, or academics trumpeting federalism?

  4. SilentChinese
    January 10th, 2011 at 14:18 | #4

    @YinYang

    in early 30s Chiang was no more america’s ally then Germany’s ally.

    But I agree this was prob more of a after thought of monetary policy of washington than some specific plan to cripple china.

    But the point is still valid: that those in washington who makes these policy arguments often do not take account of china’s national interest. It is up to china to vigorously defend its interests. because when push comes to shove tears are cheap.

  5. January 10th, 2011 at 14:55 | #5

    @Charles,

    I am glad you brought up Engdhal. To me, Engdhal falls in similar category as Hanke. They both give too much “credit” to NED and like organizations.

    There are few interesting points he made I thought worth pondering. On Al Gore not deserving a Nobel Peace Prize for his positions about global warming; I thought on the contrary Al Gore was one of the few who actually deserved it. A world where natural resources become less due to climate change is going to be much less peaceful for us humans.

    Soros is obviously famous for funding Human Rights Watch and other anti-Communist organizations. So I am not surprised when Engdhal said:

    And at the time of the destabilizing events of Tiananmen in 1989, a foundation headed by George Soros, Fund for the Reform and Opening of China, was also reportedly forced to close down after Chinese officials accused it of working with the CIA to destabilize China during the June 1989 Tiananmen time [5].

    I wonder though what would Engdhal say about George Soros’ recent comments about China:

    “Today, China has not only a more vigorous economy, but actually a better functioning government than the United States,” he said, condemning political gridlock on Capitol Hill for stalling U.S. economic reforms.

    Doesn’t this contradict the goals of HRW?

    The 1997 Asian currency collapse was blamed (to a large part) on currency speculation by Soros:

    The foreign ministers of the 10 ASEAN countries believed that the well co-ordinated manipulation of their currencies was a deliberate attempt to destabilize the ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamad accused George Soros of ruining Malaysia’s economy with “massive currency speculation.” (Wikipedia)

    For this reason, China today controls currency in/outflows carefully to avoid “hot money” wrecking havoc on China’s economy.

    Chong Tai-leung, an economics professor at the Chinese University of Hong Kong, said Monday that the HK$10 trillion figure may have been exaggerated. But he nevertheless warned of risk, citing the fact that George Soros, the financier who stormed Asia’s financial markets in 1997, has set up an office in Hong Kong and would not be doing so for nothing. (China Daily, 12/7/2010)

    The point I am trying to make about Soros is that he is looking out for his own interests – exploit whatever situations he can and make money billions of dollars at a time. He does this anywhere he can. Short a country’s currency when it is about to collapse? Absolutely. Making the collapse easier to occur? Why not?

    Note that there is a large segment within the West who does not like Soros.

    Back to the NED – I think its easier to see things neatly organized in terms of one faction against another faction. But I think it’s better to see things in terms of a messy play of self-interests; the U.S. government, Soros, NED, and etc. are the various players.

    My view is there is no U.S. president given today’s politics going to kill off NED. There are hardcore anti-China elements within U.S. society, and the NED is an outlet for them. If Obama or any other president kills it, those people will divert their energy against the president instead. What U.S. president wants that?

    Bear in mind there is no longer any overt activities – like the CIA of the past training and arming the TGIE. The U.S. government is clearly not doing that against China. The VOA’s, HRW’s, NED’s, ideological “wars” are still there.

    If China is super weak, certainly, I can imagine a NED relatively strong enough to perhaps topple the government, divide up the country, or whatever under the guise of “freedom.” BUT, China is not that weak.

    NED’s playground dwindles as the BRIC nations and the developing world continue to make progress economically. I think the U.S. budget deficit will eventually force a decline in NED’s funding – or the weakening USD will diminish it’s impact.

    Engdhal, Hanke, etc might be giving the “U.S. vs. China” too much of a play.

  6. January 10th, 2011 at 14:55 | #6

    @SilentChinese

    Agreed.

  7. silentvoice
    January 10th, 2011 at 16:37 | #7

    Thanks for that excellent article. Also worth mentioning is the lesson China can learn from Japan after it gave-in to U.S. pressures to let the yen appreciate against the dollar. This eventually led to Japan’s ‘Lost Decade’.

    This blog mentioned something about this in a previous post. http://blog.hiddenharmonies.org/2010/03/professor-jiang-ruipingrevaluation-of-japanese-yen-a-historical-lesson-to-draw-analysis/

    Many similar articles have appeared online since then drawing similarities between US’s policy to Japan then, and China now. Though like someone mentioned above, today the two countries’ economies are tied closely together. On one hand, China has reasons to be wary of US calls for a renminbi appreciation. On the other hand, not doing anything is also not in China’s interest.

    Here is a good take on the need to strike a balance: http://www.livemint.com/2010/10/28192003/Dollar-diplomacy-and-Japan82.html?h=B

  8. wwww1234
    January 10th, 2011 at 20:48 | #8

    @YinYang
    “If America “plans” to destabilize China, there are many more simpler and more direct ways to do it. One is to withdraw all U.S. investments in China and to procure all manufacturing through another poor country.”

    That is incorrect. Capital goes to where profit is maximized, and that requires a diligent and intelligent population PLUS stability, the former and especially the latter being lacking in most “democractic emerging markets”. Try to build a straight road in any indian city and you will understand why they rather solve the traffic jam either by fly overs or helicopter pads. Try to get clean water in Botswana (with a lot of diamonds and metals and no population pressure as many are dying of aid) and you will pay 3 times US price.

    It is estimated shifting the production base to other poor countries will hike US inflation by at least 2%, and that is a lot with its small GNP growth.

    The world will become round again, when oil price gets up to 200 US, then the transportation cost will force relocating production to central and south america, esp mexico. The window of opportunity for china is limited and stability is paramount.

    Mexico has NAFTA with the US but still cannot compete with china price.

    The US is ripping a lot of profit from china or else its GNP will be more in the red, and so far many chinese workers still earn a wage no more than a bit above slave pay. Theoretically, the government is saving for them with its foreign reserve/and its vast stake in the big national corporations which fortunately have become extremely market competitive.

    I hope china will stay on tract.

  9. January 10th, 2011 at 22:30 | #9

    @wwww1234

    I agree with you it is not “easy” for the U.S. corporations to simply pack up and go for another place. I also agree capital goes where the best return is. In what you quoted of me, I think I was being too obtuse.

    I know a certain U.S. company has assembly plants in Malaysia and China. Both plants compete hard against each other. At the end of the day, it is unit cost. More production is shifted towards the lowest unit cost (granted, quality, yield, etc need to be taken into account).

    The point is if the U.S. really plans to destabilize China, for U.S. companies such as the one I gave example to, could shift their production outside China at a relatively small incremental cost. If 1/3rd of U.S. manufacturing is shifted in this manner, it would have an impact on China. Then U.S. would then in the long haul pull all investments that are not directly aiming for market share within China itself.

    If the U.S. wanted to destabilize China, she would have done everything to block China’s entry into the WTO.

    Seeking profits trumps “plan” to destabilize China. I think that’s a better explanation.

    It’s absolutely not “slave” pay. What sets the price is the supply of workers who are willing to work for the wages and other benefits. If you are working in the farm for 1/10th the pay as you would get at a factory, you would clearly go for the factory.

    I suppose the Chinese government could mandate a minimum wage optimized such that China somehow remains the most competitive giving all factors considered. But our world is not in stasis and that task would be impossible. And, thus, let the “market” decide is perhaps the most efficient. What may seem “slave” wage to us may be the “market.” In my view – so be it.

  10. wwww1234
    January 10th, 2011 at 23:02 | #10

    @YinYang

    in the real world, that US company which ” shift their production outside China at a relatively small incremental cost.” , would certainly go bankrupt, as it cannot compete with other US or non-US companies.

    This could not be done on any meaningful scale with the existing rules for the game. National interest does conflict with private interest within and beyond the US.
    You may want to note the difference between GDP and GNP.
    I used “slave pay” in a comparative sense, not in a negative sense.

  11. wwww1234
    January 10th, 2011 at 23:11 | #11

    @YinYang

    as for WTO, the key is your past perfect tense.

    If Germany had anticipated ” multiculturalism is dead”, it would probably not have opened up its door to immigrant workers.

  12. wwww1234
    January 10th, 2011 at 23:23 | #12

    @YinYang

    then there was measurable objection within China to the terms of joining WTO, and premium Chu was labelled a traitor by some.

  13. January 10th, 2011 at 23:41 | #13

    @wwww1234

    in the real world, that US company which ” shift their production outside China at a relatively small incremental cost.” , would certainly go bankrupt, as it cannot compete with other US or non-US companies.

    Hey, I just gave you a real world example. That U.S. company I was referring to didn’t have that much of a difference in cost between the China and Malaysia plants.

    I am glad you reminded me the 2% argument. Again, if the U.S. “plans” to destabilize, it would be willing to tighten the belt for a “2% [considering] a small GNP growth”, no?

    Btw, I think you meant “Premier Zhu”, not “premium Chu.”

  14. wwww1234
    January 11th, 2011 at 00:30 | #14

    @YinYang

    yes, I meant Premier Zhu, thanks for the correction.

    2% additional inflation would choke off any chance for a recovery of EMPLOYMENT with good wages, and there would be more social unrest and shootings.

  15. wwww1234
    January 11th, 2011 at 00:50 | #15

    @YinYang

    for sure there is intense competition.
    see
    Andy Xie: Either America Or China Will Crash In 2011

    ttp://www.businessinsider.com/andy-xie-either-america-or-china-will-crash-in-2011-2010-12#ixzz1AiNMpwZm

  16. SilentChinese
    January 11th, 2011 at 09:56 | #16

    Hey,

    No coverage on your website on “Dustbin of History” comment by SecDef Gates while he is on route to china?

    No coverage of J-20 First flight?

    what’s wrong with you guys. 😉

    ….

    On the first note I think it created such a undercurrent of defiance in china that I think most western world fails to appreciate. Gates talk “resiliance” to China is as foolish as talking how to build parimyds to egpytians, chinese are nothing but resilent. US hasn’t suffered nearly as much trauma as china did upto and include today. And that dustbin of history? well, I gathered

    J-20’s first flight:
    remember the date: it is jan -11th. last year this date china first successfully tested a mid-course intercept of a ballistic missile (first for any nation) . 2007 this date china did a orbital shoot down of a target satellite. The target flight date has always been end of year 2010. bad weather in chengdu held up last week’s first attempt.

    This is timed to anger Gates and american delegation, Oh Please!

  17. January 11th, 2011 at 10:12 | #17

    Working on it. My lunch time activity today.

  18. SilentChinese
    January 11th, 2011 at 10:52 | #18

    @YinYang

    oh good, I thought you were hiding in a cave. 🙂

    also do inlcude the bit about Gates said HJT seems surprised to learn, i.e. rift between Military and Civilians.

    I think it might be more of a case where chinese were surprised that HJT was asked about the jet.

    this stuff was plastered on front page of Xinhuanet.com and Sina.com.cn with in half an hour of its outing. how gullible do you think HJT and the entire chinese civilian leadership is?
    PLAAF 34th DIv. VIP 777 transport tail B-4020 and B4018 737s was spotted on the CAC tarmac carrying civilian vips shortly before this thing flew. same as last week’s first attempt.

    Chinese Mil not telling Civs what’s up? OH PLEASE… may be they were just surprised that Gates is bold enough to ask.

  19. SilentChinese
    January 11th, 2011 at 10:56 | #19

    …More likely some pentagon civilian intel analysts conjured up some theory how military was rogue and pentagon echo chambered it. so everything it sees is fitting into that mold.

  20. Charles Liu
    January 11th, 2011 at 12:04 | #20

    @SilentChines
    Can you blog about the VIP jets? I’d love to see some pictures.

  21. SilentChinese
    January 11th, 2011 at 15:11 | #21

    @Charles Liu

    ? which VIP jets? the 737s used by PLAAF as VIP flights? or VIP jets in general?

  22. Charles Liu
    January 12th, 2011 at 00:39 | #22

    Some links please? I looked for B-4020 and B-4018 landing in Chengdu but can’t find any.

  23. January 18th, 2011 at 06:57 | #23

    The US is indeed looking to destabilise China, and more. Read this:

    http://www.bearcanada.com/fae/usa/whatdotheythinkabout.html

  24. pug_ster
  25. Tony Chopkoski
    March 11th, 2011 at 14:56 | #25

    China died long ago. The artificial resurgence on the world’s money scene of this police state is but a prelude to the final denouement…that of an ersatz oligarchy that is itself run by tribal hands who will divide the country into warring fiefdoms. There is nothing in China but a propensity to self-implode when the time is ripe. The stronger a police state seems for the moment the more rigid and breakable it becomes. History shows us that time…and time again.

  26. zack
    March 11th, 2011 at 15:24 | #26

    SilentChinese :
    @YinYang
    oh good, I thought you were hiding in a cave.
    also do inlcude the bit about Gates said HJT seems surprised to learn, i.e. rift between Military and Civilians.
    I think it might be more of a case where chinese were surprised that HJT was asked about the jet.
    this stuff was plastered on front page of Xinhuanet.com and Sina.com.cn with in half an hour of its outing. how gullible do you think HJT and the entire chinese civilian leadership is?
    PLAAF 34th DIv. VIP 777 transport tail B-4020 and B4018 737s was spotted on the CAC tarmac carrying civilian vips shortly before this thing flew. same as last week’s first attempt.
    Chinese Mil not telling Civs what’s up? OH PLEASE… may be they were just surprised that Gates is bold enough to ask.

    americans should be more concerned about the disconnect and outright mutiny of the pentagon when it comes to the USG-especially under the obama admin.
    remember a while back when the pentagon under petraeus were seeking to force obama’s hand into surging afghanistan by strategically leaking classified info to the press?
    amazing thing is, americans continue living under the delusion of ‘freedom’ and think nothing of an active military in politics

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