SUN WUKONG China's yuan in conspiracy crossfire
By Wu Zhong, China Editor
HONG KONG - China, due to its semi-closed and less-developed financial system,
is one of the countries least affected by the financial crisis devastating the
free economic world. This enables the Chinese to stay largely aloof, taking a
detached attitude in their observation and discussion of the crisis.
Mainstream Chinese public opinion holds that the country can learn lessons from
the crisis as China makes its own financial reforms, helping it to attain a
healthy balance between financial renovation and supervision.
Against that grain, a conspiracy theory has been aired in state-controlled
media that the global financial crisis is perhaps a
"currency war" waged by the West or some Westerners to contain the rise of
China.
The xenophobic theory fails to explain why the West, or Western conspirators,
would want to instigate such a devastating, almost suicidal, crisis, merely to
contain China. Nevertheless, Oriental Outlook, a weekly published by the
state-run Xinhua News Agency, carried a cover story in its October 30 issue
headlined "Is the Financial Crisis an Outcome of Currency Wars?"
The headline refers to a popular book published last year entitled Currency Wars,
written by Chinese American financial analyst Song Hongbing, who used to work
on Wall Street.
According to Song's book, a small group of European bankers from the period of
Napoleon in the early 19th century has gradually gained control of the central
banks of the United Kingdom, continental countries, and then North America.
With their control of wealth, they secretly established a wide network of
politicians, financiers and media moguls. Song links major events in modern
history, such as the American Civil War, the two world wars, the Great
Depression of the 1930s, the oil crises of the 1970s and the fall of the Soviet
Union in 1990s, to the manipulation of a handful of Western private bankers.
Japan's economic recession in Japan since the 1990s and the Asian financial
crisis starting in 1997, according to Song, were also outcomes of "currency
wars" waged by this cabal of global financiers to destroy Asia's "miracle
economies".
The author predicts at the end of the book that China would be the next target.
The country's huge foreign exchange reserves could sharply "shrink" in value if
the yuan was forced to revalue rapidly (which could also be done by a quick
devaluation of the US dollar). To avoid losses caused by such a possible
currency war against the country, he advised that China adopt the gold standard
and convert its foreign reserves into the precious metal.
Song's book was published in May 2007 when China was facing growing pressures,
particularly from the US and European Union, to revalue its currency, and his
view immediately attracted wide attention. It was said Wang Qishan, now the
vice premier overseeing financial affairs, recommended that financial officials
read the work, which in six months sold 600,000 copies.
The book, not surprisingly, was soon criticized by serious researchers in
economics. Frederick Zuliu Hu, managing director of Goldman Sachs (China),
published a lengthy article entitled "Imaginary 'Currency Wars'" in late 2007.
Pointing out the arbitrary and erroneous historical and factual references in
Song's work, Hu described as too far fetched the author's linkage of
practically all modern man-made disasters, including assassinations of US
politicians, to a cabal of international bankers seeking to maintain control on
the right to issue money.
"This book is entertaining ... But we would be surprised and unnerved if
readers and government policymakers regarded it as a serious book and took its
proposals into serious consideration."
Zhiwu Chen, a senior economics professor with Yale University, said Song's
proposal to restore the gold standard was "funny nonsense". In an interview
with Voice of America, he suggested the book be read like a fantastic Chinese
kung fu novel.
Gene Chang, economics professor with University of Toledo, said Song's book was
"completely wrong in its whole framework" and contained "commonsense errors".
Song's advice for holding gold was nothing new. Before him, many Chinese
economists had proposed that China spend a considerable proportion of its
foreign reserves to buy gold and oil as strategic reserves, diversifying its
huge and growing foreign reserves. Rumors about China increasing its gold and
oil reserves began to push up prices on world markets in early 2006.
Yet as other economists pointed out, the proposal was not feasible and
practical simply because there is not enough gold on the world market for China
to buy. When gold was at US$1,000 per ounce earlier this year, that was
equivalent to US$36 per gram or US$36 million per tonne. If China spent only
10% of its US$1.9 trillion foreign reserves to buy the metal, it could buy
about 5,277 tonnes, or nearly nine times its current gold reserve of 600 tonnes
- or 18% of the 29,822 tonnes of gold reserves held by all central banks in the
world, according to World Gold Council statistics.
Undaunted, Song, in an interview with Oriental Outlook, said the current global
financial crisis proved his predictions accurate. He implied that the financial
crisis was a result of a co-conspiracy, and the lack of financial supervision
(in the US) could have well been a deliberate action.
He argued that US politicians, bankers and average citizens benefited from a
booming housing mortgage finance market. Politicians wanted to boast to voters
that housing was affordable to everyone and their property would be worth more
and more. Bankers hoped to profit by launching high-leverage derivatives in the
name of financial renovation, while ordinary people could easily own their
housing or get cash by re-mortgaging their homes. Therefore, virtually without
regulation, mortgage finance had become increasingly complex in its structure,
with more and more derivatives issued until the bubble burst.
It is true that in markets, each party seeks its largest interests. But by
using the term co-conspiracy, Song owes his readers an explanation of how
various parties, each through their own selfish motivation, could have ever
thought out and worked together to achieve such a common aim, that is, to
inflate the market bubble to cause a financial crisis.
Xu Xiaonian, a professor with China Europe International Business School, told
Oriental Outlook that no one in the world would ever have wanted to see the
global credit system become paralyzed, in spite of the undeniable fact that
bankers on Wall Street were greedy and US politicians might have wished to
improve living conditions of low-income citizens. "At least no evidence so far
shows all this is a result of deliberate actions by some morally evil persons,"
he said.
Song asserted that some Western financiers could be the winners in the
financial crisis. Off-shore funds could be a "back door" for hedge funds and
investment banks that had already transferred their interests to places without
restraining regulations, such as Caribbean islands, before the onset of the
post-bubble "winter", he said without elaboration.
China is one victim of the financial crisis, the Oriental Outlook special
report claimed, quoting other Chinese economists to support Song's view. To
rescue the market, the US would have to issue more Treasury bonds and China,
which held US$541 billion worth of Treasuries as of the end of August, would be
forced to buy in more. "In this sense, China and other major creditor countries
like Japan [are forced to] pay the price of the US financial crisis," it said.
Shen Minggao, chief economist of Citibank (China), said that as long as China's
foreign reserves continued to grow the country had to buy more US Treasury
bonds because there were no other alternatives. Yet a growing fiscal deficit in
the US would lead to devaluation of the dollar, forcing the yuan to revalue. As
a result, China’s investment in US assets would also devalue in terms of the
yuan.
Thus the Oriental Outlook article came to an old conclusion that US or Western
pressures to revalue the yuan would hurt China's interests and check the rise
of the Middle Kingdom. Since China has stubbornly refused to budge on the
issue, a "currency war" has now been waged to force a revaluation of the yuan
by devaluing the greenback.
That xenophobic suspicion is illogical and against the facts. For if ever there
is such a "currency war", then it is against the major principle of Sun Zi
(Tzu) as enunciated in his Art of War - that the aim of a war is to kill
as many enemy soldiers as possible while preserving one's own forces with the
greatest effort possible. Mao Zedong once elaborated that this as "it is a
losing business to kill 3,000 enemy soldiers with 800 of our own men killed".
Would Western conspirators be so foolish as to risk the collapse of their own
financial system and economy just to cause some losses in China’s US$1.9
trillion in foreign reserves?
Since the US is the leader of the world economy, its problems will inevitable
affect other countries, especially given the fast economic globalization of the
past decade. It is hardly a valid argument that the "currency war", if there is
one, is aimed particularly at China.
To the contrary, China, either in its financial system or its real economy, is
perhaps the major economy least affected by this global financial crisis. Both
Chinese President Hu Jintao and Premier Wen Jiabao have publicly acknowledged
this fact.
Yet, while the Oriental Outlook article hardly represents the mainstream of
public opinions on the current global financial crisis, the decision to
highlight Song's views in such a national magazine suggests xenophobic
suspicion and distrust of the West still exist in influential circles. This is
also evident in calls through online discussions and elsewhere for the Chinese
government not to pro-actively participate in financial rescue packages
initiated by Western countries.
It is to be hoped that Chinese leaders will not be influenced by such feelings
when making policy decisions. For China is no longer an isolated country. While
benefiting from economic globalization, it must also take up its global
responsibilities as a rising world economic power.
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