Sunday, June 14, 2015

China's Pursuit of a New Economic Order

A change in the world economic order certainly fits in with what we cover here on this blog which is potential monetary system change. This article by the Director of the China Center for Economic Studies talks about how China is trying to remake the world economic order more in its favor. We continue to note however, that virtually every credible Chinese official or expert that touches on this topic talks in terms of a slow and gradual process over many years. Below are some quotes from this article by Zhang Jun.

"Economists are increasingly divided over China’s economic future. Optimists emphasize its capacity for learning and rapid accumulation of human capital. Pessimists focus on the rapid decline of its demographic dividend, its high debt-to-GDP ratio, the contraction of its export markets, and its industrial overcapacity. But both groups neglect a more fundamental determinant of China’s economic prospects: the world order.

The question is simple: Can China sustain rapid GDP growth within the confines of the current global order, including its trade rules, or must the current US-dominated order change drastically to accommodate China’s continued economic rise? The answer, however, remains unclear.

One way that China is attempting to find out is by pushing to have the renminbi added to the basket of currencies that determine the value of the International Monetary Fund’s reserve asset, the Special Drawing Right (SDR). As it stands, that basket comprises the euro, the Japanese yen, the British pound, and the US dollar.

The SDR issue was the audience’s main concern when IMF Managing Director Christine Lagarde spoke in Shanghai in April. Her stance – that it is just a matter of time before the renminbi is added to the basket – garnered considerable media attention. (Regrettably, however, the media read too much into her statement.)

Former US Federal Reserve Chair Ben Bernanke faced the same question in Shanghai last month. He was purposely vague in his response: the renminbi’s inclusion in the SDR would be a positive step, he said, but it could not be taken until China makes much more progress in reforming its financial sector and transforming its growth model."

. . . . 

"From China’s perspective, sustained domestic economic growth seems unlikely within the existing global system – a challenge that Japan and the other East Asian economies did not encounter during their economic rise. Indeed, the only country that has encountered it is the US, when it replaced the UK as the world’s dominant economic and financial power before World War II; fortunately, that precedent is one of accommodation and a peaceful transition.

To be sure, China still needs to undertake important domestic reforms, especially of the financial sector, in order to eliminate distortions in resource allocation and stem the economy’s slowdown. But the refusal by China’s leaders to pursue export-boosting currency depreciation, even in the face of decelerating growth, suggests that they are willing to make the needed sacrifices to secure the renminbi’s international role and, with it, long-term economic growth and prosperity.

Whether or not the renminbi is added to the SDR basket this October, a gradual transformation of the global system to accommodate China seems all but inevitable."

My added comments:

One of the two big questions we are following here is whether or not we will get another major financial crisis or not. Time goes by with not much change despite a lot of events like Greece that attract headlines. Those expecting another crisis still expect one. Those who don't are not worried about it at all. 

If the changes we have talked about here do unfold over many years (like this article suggests) rather than under crisis conditions, most people will not really notice the changes or understand how they might impact them. Slow and incremental change mostly goes unnoticed by the general public. The public attention span simply does not last long enough to keep track of change that happens slowly over time. Even fairly significant changes.

Because the conditions for a crisis are still present, we must continue to follow this question here for readers. Eventually however, if no crisis unfolds, it will become obvious that there may not be much need for this blog. At least not in the same role it began with as a watchdog for events leading to sudden monetary system change.

We will continue to follow events here for now. By the next US elections (Nov 2016), if no major crisis or changes have taken place, it will be time to evaluate if there is a continued need or purpose for the blog. Virtually all those expecting one are convinced it will happen before then. So far they are still waiting and think that they see signs that one is coming soon. On the other hand, no sources that I know inside the system are concerned that a crisis is about to arise, despite the known existing risks.

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