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China does not want to internationalize the RMB to challenge the dollar

If you understand anything about China’s monetary system, you’d know this is true.

In fact, I have laid out the exact mechanism that China can deploy to internationalize the RMB in the second part of my comments. A Chinese-style Marshall Plan is going to be needed if China is even half serious about challenging the dollar.

If you want to earn/save money, somebody else has to be willing to spend first. If the world’s biggest deficit spender decides it wants to stop/reduce spending, then somebody else must step up to deficit spend to absorb all the surplus exports from the Global South. If China still wants to be a net exporter country, then everyone would be competing with one another, racing to the bottom with poorer countries losing out first and allowing IMF to come in and reap a harvest.

China’s insistence to rely on earning foreign currencies through trade surplus such that they don’t have to overshoot their budget deficit target of 3% (an arbitrary value as determined by the IMF) should tell you everything about how Chinese economic planners see their role within the framework set by the IMF.

Why can’t the People’s Bank of China simply create the currency out of thin air to finance development? Why can’t China just go to 5%, 6%, 7% or even 8% budget deficit instead of relying on current account surplus to issue the yuan? But oh no, IMF says we’re not being fiscally responsible if we go above 3%! We want to show IMF we’re the goodest boys and so we continue to suppress the wages of our labor, sell cheap goods to Western countries and let foreigners enjoy cheap Chinese goods in exchange for… a bigger number on my bank account which I won’t be using anyway.

Evergrande bankrupting the PRC and putting it in a weak negotiation position

I never said that. China is a country with monetary sovereignty, which means it cannot go bankrupt unless it is a political choice chosen by its leaders.

I said that the property bubble bursting in putting significant financial strains on the local governments’ debt burdens. Last November, the Chinese government unveiled the 12 trillion yuan debt relief program - raising 6 trillion yuan debt ceiling such that local governments can borrow at a cheap rate to pay back their higher rate debt, 4 trillion yuan to be financed through bond issuance, and 2 trillion yuan to be paid as agreed by the initial contracts.

So, in order for the local governments to borrow new debt at a cheaper rate, the interest rate in China has to go down, and what better way to lower the interest rates than the Fed itself lowering the key rates? I never said anything about bankrupting the country lol, as if the world’s second largest economy with the largest industrial capacity can go bankrupt without the leadership doing so by choice. Japan has been on a zero growth trajectory for the past 35 years, and yet I never heard anyone saying about Japan going bankrupt or collapsing or going to become “third world country”??

If you have paid attention to anything I’ve written, in China, the local governments ARE the landlords! And that’s a big problem for the central leadership right now. Mao’s purging of landlords that was completed back in 1954 under the Three Socialist Transformations had been reversed, with quite an ironic twist.

As I have said, the local governments contribute nearly 50% of the tax revenues and 85% of budget expenditures. If the central leadership decides to punish the landlords, the plunging land revenue would mean the local governments running out of money to finance themselves, and that inevitably means cutting spending on public utilities and social spending, and ultimately bring forward a recession. The entire monetary system needs to be reformed, or else being tied to the property market would have disastrous consequences. It’s a damned if you do, damned if you don’t situation.

One of the most significant changes in the Chinese governance under Deng’s reform was the decentralization aspect of the central authority - a clear shift from Mao’s highly centralized planned economy to the relegation of political and economic authority to the local governments. However, what truly precipitated in today’s property market crisis began under the 1994 Tax-Sharing Reform, which imparted the land financing role to the local governments.

What is important to recognize is that under the unique style of Chinese governance, the local/municipal governments are largely responsible for financing developments, while the central government controls the priorities/set focus through the promotion of the local governments bureaucrats. A major performance indicator is GDP growth - and this will become very important below.

After the 2009 GFC, with dwindling export revenues as the world went into a recession, many local governments under financial strains began to look elsewhere to sustain their GDP growth. With the central government’s 4 trillion stimulus package to shift the nation’s priority into infrastructure building, the local government officials found a way to game the system.

Here’s how it works in a simplistic sense (and we know all this, ironically, because of the Evergrande’s court case documents lol): the local government would use its political power to court financial institutions (commercial/investment banks) into issuing new loans to property developers, who would then build new cities, infrastructure, high speed rails etc. to raise the land value. Since the local governments have the power of land financing, they’d be able to ride on the rising land value to reap the profits through leasing/selling land. The calculation is such that the development of new cities and infrastructure would raise the land price by so much that they’d be easily pay off the massive debt they had taken out and even with excess profits to spare. All the investment would made the GDP growth numbers go up, and many local government officials made the career promotion of their lifetime throughout the 2010s.

And I have said this before: the reckless property market speculation starting in the mid-2010s would end up being the biggest misallocation capital in history. Instead of deploying the labor and resources toward ensuring universal healthcare and social welfare, all of that instead went into an asset speculation frenzy that anybody with some common sense would know it cannot possibly last, and yet everyone feared that they would be the one to miss out! This sort of psychology is all too common and so everyone, including the leadership at the highest level, continue to turn a blind eye to it - until the inevitable happened.

Ironically, Russia tried to show China the way by forgiving $23 billion debt among African countries, which, if China had followed suit, would have paved the way towards dedollarization and ending the US monetary hegemony. Instead, China doubled down on protecting the dollar hegemony (can’t give up that $4.5T USD reserve that easily huh) and effectively putting an end to the whole BRICS dedollarization push.

Please explain why China shouldn’t use its massive dollar reserves to pay back the Global South’s debt. Why would China need $4.5 trillion dollar reserve (with ~$800 trillion in US treasuries) other than it making the bank account number look big?

I never had anyone who can answer the question but you’re welcome to give it a go, and I promise I will provide a satisfactory explanation in response.

You know better than the PRC's planners?

Yes, my sources are actual Marxist economists like Jia Genliang and Zuo Da Pei, who have been warning that the lack of a strong consumer base in China is going to put China in a hugely disadvantageous position when the American empire decides to flip the table, going as far back as the 2000s!

And for the record, you should know that the most prominent economic advisor in China today, Justin Lin Yifu, is literally the protege of Theodore Schultz, the co-founder of the Chicago School of Economics together with Milton Friedman. Lin himself was the first Chinese PhD student to ever graduate from the Chicago School of Economics - the heartland of neoliberalism.

So yes, I am confident in saying that neoliberals are almost always wrong about economics, and even a tiny bit of Marxist/MMT knowledge would put you in front of them.

I have said this before and I will say this again: China’s economics profession has been completely captured by Western-educated neoliberals. Legendary Marxist economists like Xue Muqiao are a thing from the past, and the fervent Marxist ideologues like Chen Yun et al. have long been purged from power since the 1990s during the clash between Deng Xiaoping (who came out of retirement during the 1992 Southern Tour) and Chen Yun (who advocated to stop the liberalization and return to Maoist planning era after the June 4th Incident aka Tiananmen Incident in 1989).

Deng threatened to launch a coup against Jiang Zemin (Chen Yun’s protege) during the Zhuhai meeting in 1992. Jiang folded - and opened China’s road wide open for liberal reform. The vestiges of Marxist ideologues were all purged in the 1990s. Xi is an interesting figure who has (had?) aspirations to turn away from neoliberalism, but as you can see from the ending of Zero Covid to the more recent events - with Li Qiang (from the liberal Shanghai gang) promoted to the Premier and making numerous public appearances and openly boasting about promoting a business friendly environment to the capitalists - it is very clear that Xi is no longer capable of stopping the liberals.