Say hello to a yuan world

The Chinese Communist Party dreams of a world trading in yuan – but first it needs to clean up its own house.

Virtually, every Asian currency is trading more closely with the yuan than with the US dollar [EPA]

We all know the new names of the new generation – from Xi Jinping, now General Secretary of the Chinese Communist Party (CCP) before he’s anointed President next year, to Vice-Premier Li Keqiang. Yet what’s in a name? Not much, because now China is all about structural attack; how to tweak the model of breakneck economic growth coupled with political stagnation – while at the same time battling corruption. 

Xi has already warned the Politburo, “If corruption becomes increasingly serious, it will inevitably doom the party and the state”. Well, it is already so serious that Xi himself is losing his sleep with the very real possibility of an Arab Spring in Mandarin, even though fast developing China is not exactly an economic underdeveloped Egypt. Yet autocracy and corruption remain very much in the picture.  

Chinese culture is all about numbers. The Top 3 sources of sleepless nights for the majority of Chinese are inflation, corruption and inequality. So, essentially, it’s the economy, stupid. But as the economy hits a rockier path, the masses inevitably start asking questions about all things dysfunctional inbuilt in single party rule. Thus, in the end, this surge of corruption as an “existential threat” to the system.   

Oh, that crisis again 

Let’s start with the economy. Since 2008, with the effects of the made in USA global financial crisis merging with the incremental rise of Chinese wages, it’s now clear that China’s previous export model needs to be recalibrated. China’s labour-intensive apparatus is now delocalising en masse to Indochina – especially Cambodia and Vietnam. 


 China economy

To compound matters, there’s a housing market bubble ready to burst. And then there’s the Great Leap Forward of China’s MTV/Google generation – the baby boomers of the 1980s and 1990s. As far as they’re concerned, the autocracy/corruption lethal couple is the absolute opposite of the typical Chinese “win-win” situation.  

But in the long run, is it all that bleak for the Chinese model? Not really. After all, the competition is not exactly over-performing. 

Let’s take a geopolitical diversion. Last week, a re-elected President Obama parachuted into a summit in Phnom Penh, Cambodia, to sell a US-concocted Trans-Pacific Partnership (TPP) deal, a NAFTA-style free trade mechanism excluding China. 

Well, what really happened is that on November 20, the Association of Southeast Asian Nations (ASEAN), plus China, India, Japan, South Korea, Australia and New Zealand – that’s no less than half the world’s population – announced they would start a Regional Comprehensive Economic Partnership, excluding – you guessed it – the US itself. Game, set, match Beijing.   

It’s not hard to see why. One number is enough: 2008. 

Up to 2008, turbo-capitalist globalisation – centred on the US – was the name of the game. In The Making of Global Capitalism: The Political Economy of American Empire (Verso, London and New York, 2012), Leo Panitch and Sam Gindin amply demonstrate the strategic importance of US capital in areas such as information technology. 

Up to 2008, the US accounted for up to 75 per cent of all research and development investment in the industrialised world on aerospace and scientific instruments, and up to 50 per cent in electronics and pharmaceuticals. US corporations dominated in high-tech and business services (management, legal, engineering, consultancy, financial). 

It had the Top 3 out of 4 in technological hardware, software and computers, aerospace/military, and oil equipment and services. It had the Top 4 out of 5 in global media. It had 2 of the Top 3 in pharmaceuticals, industrial transportation, industrial equipment and fixed-line telecom. And it had 9 of the Top 10 in global financial services. 

After the greatest economic crisis since (and including) the Great Depression, the US number one competitive advantage – its unbounded innovation drive – went downhill, as venture capital for high-tech manufacturing simply disappeared. Asia wants and needs from the US high-tech, high-value-added manufactured products. What it does not need is a superpower borrowing like there’s no tomorrow to finance a multi-trillionaire government debt.  

Meanwhile, in parallel, we had trade between China and the rest of Asia overtaking trade between Asia and the US. Another way of framing it is that, in economic terms, Obama’s “pivoting to Asia” is already DOA. 

Once again, let’s look at the numbers. Asia as a whole is exporting 20 per cent more than at their export peak – which was before the 2008 crisis. Europe, on the other hand, is exporting over 20 per cent less. 

China is exporting 50 per cent more to the rest of Asia – no less than three times more than it exports to the US. Chinese exports to the US are not moving up. Ten years ago, China imported five times as much from Asia as it did from the US. Now it imports 10 times as much from Asia, compared to the US.  

“Of course, there will come a time period of three simultaneous global reserve currencies – the US dollar, the euro and the yuan; but, eventually, the world’s top currency will be the yuan.”

Currency follows trade (and to think that Mitt Romney wanted to launch a currency/trade war against China on Day One of his – failed – presidency). Virtually, every Asian currency is trading more closely with the yuan than with the US dollar. Everyone travelling to East Asia will notice that the yuan is already the de facto reference currency. This is an inevitable outcome of increasing regional trade integration.   

Got yuan, will travel 

Over the past few months, a lot of hype enveloped the possibility of a Chinese (economic) hard landing. It won’t happen. On the contrary, the Chinese economy is picking up in the fourth quarter, growing 8.4 per cent (compared to 7.4 per cent in the third quarter), according to a recent report by the Institute of Economic Research of Renmin University. 

China will end up growing 8 per cent in 2012 – certainly 1.3 per cent less than in 2011, but still above the previously predicted 7 per cent. That’s due to a boom in domestic consumption and a lot of investment in infrastructure; at the same time, there are no signs of mass unemployment or deflation. This may be a sign that the CCP is doing the basics right – before the much-vaunted internal fight against corruption. According to the Institute of Economic Research, by 2013 China will be growing again at an astonishing 9.3 per cent.  

Washington think-tanks of the exceptionalist school should start considering a stark fact; it is getting increasingly more complex and more expensive for the US to maintain its hegemony. All over Asia, the US dollar is in relative decline. And historically this decline does mirror the decline of the British pound – as well as Britain’s imperial power – from 1918 to the mid-1960s. 

Obviously, the decline of the US dollar happens in parallel to the rise of the yuan. The yuan will become fully convertible even before the usually brandished deadline of 2020. This means that within the next five years, most if not all of East Asia will be part of the yuan bloc. Inevitably, China will be the top trading partner of every nation in East Asia. 

This means that most of their trade will be in yuan; the reference currency for their own currencies will be the yuan; and the reserve currency for everyone will be the yuan. Of course, there will come a time period of three simultaneous global reserve currencies – the US dollar, the euro and the yuan; but, eventually, the world’s top currency will be the yuan. 

There’s nothing any Pentagon pivoting can do about it. As for the Middle Kingdom, now it’s time to concentrate in battling the Three-Headed monster; corruption, corruption, corruption.    

Pepe Escobar is the roving correspondent for Asia Times. His latest book is named Obama Does Globalistan (Nimble Books, 2009).