Volume 5, Issue 14
President Trump is scheduled to meet with the People’s Republic of China’s President Xi this Thursday. The topics highlighted for discussion are the trade imbalance and how to deal with North Korea’s Kim Jong-un. Both topics are critical to the peace, security, economies, and development of both countries. However, there is a third long-term, critical issue that must be addressed – the Chinese banking system.
Why is this so critical?
Because the Chinese do not adhere to Western accounting protocol and principles on currency management. Communist theory is based on the fact that the government can dictate what goods and services the economy produces, and currency is there to facilitate that development. In a capitalist system, free enterprise, through the people’s freedom to choose what products they will buy and services they will use, dictates the growth of the economy. The government provides currency through monetary policy to facilitate the people’s economic choices and level of activity.
China has established its own World Bank counterpart, the Asian Development Bank. It did this for two reasons. First, China has difficulty in dealing with the transparency laws of the United States. Second, China’s communist system requires its own banking standards to allow them to implement a monetary policy that does not account for currency with the same discipline as Western accounting protocol. A communist banking system and a capitalist banking system cannot co-exist, be reconciled, or be efficiently coordinated. The Chinese mismanage their currency more than they manipulate it. A fluid exchange rate cannot be established between the Yuan and the Dollar unless both banking systems, accounting systems, and central banks operate under the same procedures.
When the Soviet Union collapsed in the early 1990s, there was little impact on the world’s economy. The USSR economy was less than 2% of the world GDP. There were little few international banking relations with the Soviet Union. Money could not be wired in and out of the Soviet Union freely. Therefore, when they collapsed, their economic impact on the world banking system was minimal. It was an implosion like the demolition of a downtown office building. The surrounding structures were basically left unaffected.
China is a different story. They represent today approximately 20% of the world’s GDP. Their banking system is worldwide. They are members of the World Trade Organization and their currency is in a probationary period for establishment as a reserve currency (tradeable pursuant to a free-floating exchange rate). For China and the United States to co-exist, one system of banking must be dominant over the other. Two economies of the size represented by China and the U.S. cannot be blended to include free-floating currencies without using the same standards for banking, monetary policy, and currency management.
When President Trump and President Xi meet and trade agreements between our countries are addressed, China must understand that they have to reform their system. This means bringing the Asian Development Bank under the authority of the World Bank. The Chinese should be given a seat on the board of the World Bank. The United States dollar is the world’s primary currency now, and will be for the foreseeable future. The United States should aid China in the transition to a true free enterprise, capitalist banking system. China must recognize the need to reform.
The United States then has an obligation to manage the dollar as the standard for exchange rates for all other currencies. To achieve this, it is incumbent upon the U.S. to balance its budget and pay down its debt. As the U.S. continues to print dollars and borrow money, it weakens the currency and exacerbates the exchange rates of other countries who rely upon the dollar for their own capital reserves.
Just as the United States had a moral obligation and commitment to stand against the totalitarianism of the former Soviet Union, even if it meant conflict, the U.S. also has an obligation to demand that free enterprise be the basis for economic policy for the world, even if it means further conflict with China. If China resists reform, the U.S. must resist economic communism. The Soviet Union threatened world societal freedom. China threatens world economic freedom. Freedom, in both cases, is essential to the rights of an individual.
Like the standoff of the Cold War when nuclear war was deemed an unacceptable option, ultimate conflict with China is also unacceptable in that it could result in mutually assured depression.
Russia historically has looked outward and been aggressive to its neighbors. Yet the Soviet Union, as communists, looked inward economically. China historically has looked inward and has protected itself from foreigners (i.e. the Great Wall of China.) Yet China, as communists, has looked outwardly economically. A collapse of their economic system would have dramatic repercussions to the world’s banking system.
The United States stands for freedom. It is who we are as a people and as a culture. We should offer China genuine support and aid in reforming their banking system. And we must discipline ourselves to be sound stewards of the world’s primary currency.
But under no circumstances should the United States abandon our economic principles. The world’s prosperity and the opportunity of the generations depends upon the United States defending freedom.
My name is Marc Nuttle and this is what I believe.
What do you believe?