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中国的大循环及货币(部分)

分类:行业动态|来源:Linkedin|时间:2020-09-28 15:23:43|浏览:250 次

Chapter 6: The Big Cycle of China and Its Currency

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Preface: Several people told me that it is risky for me to write this chapter because the US is in a type of war with China and emotions are running high, so many Americans will be angry at me when I say complimentary things about China, many Chinese will be angry at me when I say critical things about China, many people on both sides who disagree with something I say will be angry at me for saying it, and many in the media will distort what I say.  However I can’t not speak openly out of fear of reprisals because the US-China relationship is too important and too controversial to be left untouched by people who know both of these countries well, and for me not to speak honestly about this situation would cost me my self-respect.

On Thursday September 24th, I’ll be releasing the follow-up chapter to this one, which is about US-China relations and wars. Unlike the prior chapters that have been on the past, that chapter is about the most important things that are going on between these two countries now. If you find this chapter on China’s history interesting, you’ll find the next one even more so.

What I am passing along here is just the latest iteration of my learning process.  My process is to learn through my direct experiences and through my research, to write up what I have learned, to show it to smart people to have them attack it in order to stress test it, to explore our differences, to evolve it some more, and do that over and over again until I die.  So this study is the product of my having done that for the past 36 years up until now.  It is incomplete, it is right and wrong in ways yet to be discovered, and it is provided to you to use or to criticize in the spirit of helping us together find out what’s true.

This chapter is about China and Chinese history brought right up to this moment.  It is meant to convey where the Chinese are coming from.  The next chapters are about US-China relations and wars that are extensions of the backgrounds covered in the last two chapters and this chapter.

My Background

Though I’m no expert on Chinese culture and the Chinese way of operating, I have had numerous direct experiences with China over nearly four decades, I have done extensive historical and economic research about China, and I have a US and global perspective that has been gained because of my need to make practical macroeconomic bets.  That has given me an uncommon perspective of where China has been and what’s going on with it now that might be helpful to those who haven’t had such an extensive exposure.

More specifically, the perspective I am passing along to you here has been gained from 36 years of interfacing with Chinese people about Chinese and world issues (mostly economics and markets in China and the world) and from doing a lot of research.  Through my experiences and by getting to know some of China’s top leaders, in addition to learning about Chinese economics and markets, I learned a lot about Chinese culture, how it operates today, and how it has evolved over thousands of years: from notions of how family members and others should behave with each other to Confucian thinking and neo-Confucian thinking, and through various dynasties and modern leaders to the lessons these events provide about how leaders should lead and how followers should follow.  These typical Chinese values and ways of operating are what I’m referring to when I say “Chinese culture,” which I have seen manifested over and over in my experiences and my research.  For example, from my personal experiences I could see how Lee Kuan Yew, the Prime Minister of Singapore, and Deng Xiaoping, the leader who initiated China’s reform and opening up, were connected by Confucian values coexisting with capitalist practices so that they together could explore how China could have a “socialist market economy with Chinese characteristics.”

Over the last couple of years I have also undertaken the study of Chinese history as part of my study of the rises and declines of empires and their currencies in order to learn the timeless and universal principles about how empires rise and decline and to help me understand how the Chinese, especially their leaders, who are greatly influenced by history, think.  I did this study by researching deeply with the help of my research team and triangulating with the some of the most knowledgeable Chinese, American, and non-American scholars and practitioners on the planet.  While I can be pretty sure about my impressions of the people and things that I had direct contact with (which makes me a lot more certain about the assertions I am making about the Chinese than about the Dutch and British empires I described earlier in this book), I of course can’t be as certain about the people and circumstances that I haven’t had direct contact with.  So my thoughts about them (e.g., especially historical figures such as Mao Zedong) are more conjecture based on the extensive research I have tapped into.

Over my 36 years of experience with China, I have come to know many Chinese people from the lowest to some of the highest in rank in an up-close and intimate way, and I have experienced China’s recent history just as I have experienced America’s.  As a result, I believe that I see both the American and Chinese perspectives pretty well.  I will do my best to convey them here.  I urge those of you who haven’t spent considerable time in China to get rid of any stereotypes you might have of the old “communist China” and to look past the pictures that are often painted for you by biased parties who also haven’t spent much time there, because they’re wrong.  I urge you to triangulate whatever you are hearing or reading with people who have spent lots of time in China working with the Chinese people.  As an aside, I think that the blind and near-violent loyalties and media distortions that stand in the way of thoughtfully exploring different perspectives are a frightening sign of our times.

To be clear, I’m not ideological and I don’t choose sides ideologically.  For example, I don’t choose an American side or a Chinese side based on whether it aligns with American, Chinese, or my own ideological beliefs.  I’m practical like a doctor who approaches things through logic and believes in what works well through time.  My study of history and my thinking about cause/effect relationships are what have led me to my beliefs about what works well.  What I believe is most important in making a country work well was laid out in 17 different measures of strength at the beginning of this book and more narrowly in the eight measures I have been referring to regularly.  So, when I look at China, it is through the lens of these factors that I am judging it.  I also try to see their circumstances through their eyes.  The only thing I can do is beg for your patience and open-mindedness as I share what I’ve learned with you.

This chapter is a continuation of our look at the leading empires over the last 500 years, starting with the Dutch and British empires in Chapter 3, and the US Empire in Chapter 4.  In this chapter, we will touch on China’s long history and the thinking that it has produced, we will briefly review its decline from pre-eminence in the early 1800s to insignificance early in the 20th century, and we will more carefully look at its recent emergence from insignificance to its near comparability to the world’s leading empire today—and its likelihood of becoming the most powerful empire in the world not many years in the future.

In earlier chapters we saw how the Dutch and then the British each became the richest and most powerful reserve currency empire and then declined into relative insignificance in cycles that were driven by timeless and universal archetypical cause/effect relationships.  Then we saw how the United States replaced them as the dominant world empire broadly following the same archetypical cyclical patterns driven by the same archetypical cause/effect relationships.  We saw how some of its eight key powers rose and declined (i.e., education, economic competitiveness, shares of world trade and output), while others continued to excel (innovation and technology, reserve currency status, financial market center), and we looked at how a number of the other key drivers (e.g., money and debt cycles, wealth/values/political cycles, etc.) are transpiring in the US.  In this chapter we will study China’s way of looking at its past and bring us up to this moment with the aid of objective statistical measures that help paint the picture objectively.  As in the US chapter we will cover the older history superficially; the 220 years up until 1949 in a bit greater detail; and the last 40 years, when China evolved from relative insignificance to become a great rival power to the United States, in the most detail. That will complete our examination of the rises and declines of the leading empires over the last 500 years.  Then, in the next chapter, we will look at US-China relations and wars as they now exist, and in the concluding chapter of this book, “The Future,” we will try to squint into the future.

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China’s Giant History in Brief

Anyone who wants to have a fundamental understanding of China needs to know the basics of China’s roughly 4,000-year history, the many patterns that have repeated in it, and the timeless and universal principles that the leaders of China have gained from studying these patterns—even though getting that basic understanding is quite an undertaking.  China’s history is so complicated and there are so many opinions about it that I am confident that there is no single source of truth, and I am especially sure that I’m not it.  Still there is a lot that knowledgeable people agree on, and I have found many scholars and practitioners, both Chinese and non-Chinese, who have valuable bits that make the exercise of trying to piece them together—along with other bits of history like statistics and written histories—very valuable as well as damned fascinating.  While I can’t guarantee that my perspectives about China are the best ones to believe, I can guarantee that they have been well-triangulated with some of the most informed people in the world and are presented here in an exceptionally forthright way.  Here it is in brief.

China’s civilization with its highly civilized behavior has a long and continuous history that began about 4,000 years ago.  I can’t possibly recount the extensiveness of it because there are far too many dynasties from the Xia Dynasty around 2000 BC (which lasted about 400 years and was highly civilized and known for creating the Bronze Age) through over 1,000 years of various dynasties to Confucius around 500 BC (whose philosophy greatly influenced how the Chinese behave with each other to this day), to the Qin Dynasty (which united most of the area we now call China for the first time in 221 BC), then through the highly developed Han Dynasty (which developed governance systems that are still in use today) that lasted from around 200 BC to around 200 AD, and then a number of other dynasties until the Tang Dynasty in 618.  While I scanned China’s history from the Xia Dynasty[1] through the year 600 AD (i.e., just before the remarkable Tang Dynasty), I looked at most of the dynasties since then more carefully to see the patterns.  I wrote up my study of them that I will share later.  I will now focus very briefly on the post-600 AD period.

In the chart below I plotted the same overall power gauge that I showed you in the first chart but applied only to China from 600 AD until now.  It conveys how powerful China was relative to other empires in the world over that time frame. While there were many more dynasties that existed in various parts of the country and various other slivers in time, I didn’t show them in this chart because that would have produced too much detail for the really big picture to come through. As you can see, for most of that time China was one of the world’s most powerful empires, with the notable exception from around 1840 until around 1950 when it went into a steep decline.  As shown, around 1950 it started to rise again, at first slowly and then very rapidly, to regain its position as one of the two most powerful empires in the world.



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Over most of last 1,400+ years most dynasties were very powerful, civilized, and cultured.  Under the Tang Dynasty, China expanded its borders extensively and experienced a cultural flourishing; in the Northern and Southern Song Dynasties (from the 900s to the 1200s), China was the most innovative and dynamic economy in the world; in the Ming Dynasty (1300s to 1600s), China was a great power that enjoyed an extended wonderful period that was both very prosperous and very peaceful; and in the early Qing Dynasty (1600s to 1700s), China had its maximum territorial expansion, governing over a third of the world’s population while having an extremely strong economy.  Then in the early 1800s and through the first half of the 1900s, China lost its power while European countries, and especially the British Empire, gained theirs.  The shift of relative wealth and power from Asia to Europe from around 1800 until recently, which created one of the biggest wealth and power shifts in world history in which China was uniquely weak, should be considered an anomaly rather than a norm.  This evolution and the lessons this history provides are very much in the minds of Chinese leaders and are especially interesting to me.

In the chart above, note the cyclical ups and downs.  The reasons for them are mostly the reasons I explained in my description of the archetypal Big Cycle—because of the gaining and losing of the most important strengths and weaknesses in cyclical and mutually reinforcing ways.  (My more detailed descriptions of the rises and falls of these dynasties will be given to you in Part 2 of this book, which covers the major cycles of the major empires and dynasties covered in this book in greater depth.)  Notice that these dynasties’ Big Cycles typically lasted about 300 years.  Within each of these were the different stages of development and the things done by emperors to bring the dynasties from one stage to the next, and the reasons for setbacks and declines.  In other words, there are many lessons embedded in these histories.  That is why Chinese leaders study history to learn lessons that help them plan for the future and deal with the cases at hand.  Believe me, the lessons learned from these histories are now guiding Chinese leaders’ decision making.  What was especially interesting to me was to see the patterns of the archetypal Big Cycle go back much further in history and be described in such detail because China’s continuous history is so ancient and so well-documented.  It has also been interesting to see what happened when the Eastern and Western worlds met each other and interacted from the 17th through the 19th centuries and how, as the world has become much smaller and more interconnected since then, the Chinese and Western Big Cycles affected each other so that they are now one of the biggest influences on both these two regions and the entire world.

Probably the most important thing I learned from studying hundreds of years of history carefully and thousands of years of history more superficially in a number of countries is to see things very differently than I did before I did this study.  I found shifting my perspective in this way to be similar to going to a much higher level in Google Maps because I could see contours of history that I never saw before.  I also could see that the same stories played out over and over again for basically the same reasons, and I learned timeless truths about how the really big movements take place and how to deal with them better.  Besides affecting how I view things, I see how studying so much history up to the present has greatly affected how the Chinese think relative to how Americans think.  From living in the United States, which is a country that has about 300 years of history (because Americans think their history began when settlers from Europe arrived) and from living in a country that isn’t as much interested in looking at history and the lessons it provides, I can see that the perspectives of Americans and the Chinese are very different.

For example, to Americans 300 years is a very long time.  For the Chinese it is very recent.  While having a revolution or a war that will overturn our systems is unimaginable to an American, it is inevitable to a Chinese person (because the Chinese have seen that they have always happened and the Chinese have studied the patterns of why they have happened).  While most Americans focus on particular events, especially those that are now happening, most Chinese, especially their leaders, see evolutions over time and put what is happening in the context of them.  While Americans fight for what they want in the present, most Chinese strategize how to get what they want in the future.  As a result of these different perspectives the Chinese are typically more thoughtful and strategic than Americans, who are more impulsive and tactical.  I also found Chinese leaders to be much more philosophical (literally readers of philosophy) than Americans leaders.  If you read their writings and their speeches, you will find this to be true.  Philosophies of how reality works and how to deal with it well are woven into their thinking, which is expressed in their writings.

For example, in a meeting with Liu He soon after he had his first negotiation session with President Trump, he conveyed his concerns about the possibility of US-China conflict.  Liu He is Vice Premier of China responsible for economic policy and also a member of the Politburo.  We have known each other for many years, during which we have had informal conversations about the Chinese and world economies and markets.  Over those years we came to develop a friendship.  He is a very skilled, wise, humble, and likable man.  He explained that going into his meeting with Trump, he was concerned about how it would go, not because of the trade negotiations, which he was confident didn’t have any issues that couldn’t be worked out, but because he was concerned about the worst-case scenario where tit-for-tat escalations could get out of control and lead to more serious consequences.  He referred to history and gave a personal story of his father to convey his perspective that wars were so harmful and the damage could be worse if we had another war today.  He focused on the World War I example.  We exchanged views on long-term cycles in history and his belief in the concept of a community with a shared future for humankind.  He talked about reading the Tao Te Ching by Lao Tzu and Critique of Pure Reason by Immanuel Kant, and how he realized that he should do his best, and then the outcomes would take their course.  From there he gained his calmness.  I told him that I shared that perspective.  I told him about the “Serenity Prayer” and suggested meditation to him as a way of helping to obtain that perspective.

I tell this one story to share with you one Chinese leader’s perspective on the risk of wars and to also give one example of the many interactions I’ve had with this leader and of the many interactions I’ve had with many Chinese leaders and Chinese people in order to help you see them through my eyes and also to help you see the issues through their eyes.

To understand how Chinese people, especially Chinese leaders, think and what they value, it is as important to understand their history and the values and philosophies that have resulted from generations experiencing that history and reflecting on it.  Their history and the philosophies that have come from them, most importantly their Confucian-Taoist-Legalist-Marxist philosophies, have a much bigger effect on how Chinese people, and especially Chinese leaders, think than America’s history and its Judeo-Christian-European philosophical roots have on Americans’ thinking.  That is because the Chinese, especially their leaders, pay so much attention to history to learn from it.  For example, Mao, like most other Chinese leaders, was a voracious reader of history and philosophy, wrote poetry, and practiced calligraphy—e.g., I was told by an esteemed Chinese historian that Mao read Comprehensive Mirror in Aid of Governance, the mammoth 294-volume-long chronicle of China’s history that covers around 16 dynasties and 1,400 years of Chinese history, from around 400 BC to 960 AD, and the even more mammoth Twenty-Four Histories several times as well as numerous other volumes about Chinese history and writings of non-Chinese philosophers, most importantly Marx.  I’m told that his favorite book was Zuo Tradition, which focuses on political, diplomatic, and military affairs in a “relentlessly realistic style”[2] in the period from 722 BC to 468 BC, because the lessons it offered were so relevant to what he was encountering.  He also wrote and spoke philosophically.  If you haven’t read anything he wrote and are interested in how he thought, I suggest you read “On Practice,” “On Contradiction,” and of course The Little Red Book, which is a compendium of his quotations on a number of subjects, which I only had time to skim but was impressed by.  It is interesting and informative in ways that are relevant today.[3]

As a result of their longer history and their more intensive studying of it, the Chinese are much more interested in evolving well over much longer time frames than Americans, who are much more interested in making quick hits—i.e., the Chinese are more strategic than Americans, who are more tactical.  The arc that Chinese leaders pay the most attention to is well over a hundred years long (because that’s how long good dynasties last) and they understand that the typical arc of development has different multidecade phases in it, and they plan for them.  For example, the first phase, which occurred under Mao, was when the revolution took place, control of the country was won, and power and institutions were solidified.  The second phase of building wealth, power, and cohesiveness without threatening the leading world power (i.e., the United States) occurred under Deng and his successors up to Xi.  The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China (PRC) in 2049—which is to be “a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious,” which would make the Chinese economy about twice the size of the US economy[4]—is occurring under Xi and his successors.  Nearer-term goals and ways for getting toward these goals are set out in nearer-term plans like the Made in China 2025 plan,[5] Xi’s new China Standards 2035 plan, and the usual five-year plans.[6]

Chinese leaders don’t just plan and try to implement their plans; they set out clear metrics to judge their performance by and they achieve most of their goals.  I’m not saying that this process is perfect because it isn’t, and I’m not saying that they don’t have political and other challenges that lead to disagreements, including some brutal fights over what should be done, because they have them (in private).  In summary what I am saying is that they have much longer-term and historically based perspectives and planning horizons, they bring those down to shorter-terms plans and ways of operating, and they have done an excellent job of achieving what they set out to do by following this approach.  By the way, I have coincidently discovered over many years that my studying history, looking for patterns, and dealing with tactical decisions has had a similar effect on how I see and do things—e.g., I now see the last 500 years as recent history, the most relevant arcs seem about 100+ years long, and the patterns I observe from taking this perspective are very helpful to my anticipating how events are likely to transpire and informing me about how I should be positioned over the coming weeks, months, and years.

China’s Lessons and Its Ways of Operating

The Chinese culture developed as an extension of the experiences the Chinese had and the lessons they learned over the millennia.  They were set out in philosophies about how things work and what ways work best in dealing with these realities.  These philosophies made clear how people should be with each other, how political decision making should be done, and how the economic system should work.  In the Western world the dominant philosophies are Judeo-Christian, democratic, and capitalist/socialist.  Each person pretty much chooses from these to come up with the mix that suits them.  In China, the main ones were Confucian, Taoist, and Legalist until the early 20th century when Marxism and capitalism entered the mix.  The most desired mix to follow has historically been the emperor’s most desired mix.  Emperors typically study Chinese history to see how these have worked and come up with their own preferences, put them into practice, learn, and adapt.  If the mix works, the dynasty survives and prospers (in their parlance it has the “Mandate of Heaven”).  If it doesn’t, it fails and is replaced by another dynasty.  This process has gone on from before history was recorded and will go on as long as there are people who have to decide how to collectively do things.

While I can’t do these philosophies justice in a couple of sentences each without digressing too deeply (though I will go into them more deeply in Part 2), here is the best I can do:

Of these, Confucianism and neo-Confucianism have been the most influential through time, usually with some Legalism thrown in, up until the early 20th century when Marxism gained favor with Mao and then with his successors.  I will briefly explain Marxism when we get into the 20th century.  Naturally all of these have been very fleshed out and have evolved over time, along with the ways that the emperor and government operate.

All of these Chinese systems from the beginning of recorded history were hierarchical and non-egalitarian. I was told by one of the most senior Chinese leaders, who is also a highly informed historian and an extremely practical top policy maker, that the core difference between Americans and the Chinese is that Americans put the individual above all else and the Chinese put the family and the collective above all else.  He explained that Chinese leaders seek to run the country the way they think parents should run the family—from the top down, maintaining high standards of behavior, putting the collective interest ahead of any individual interest, with each person knowing their place and having filial respect for those in the hierarchy so that the system works in an orderly way.  He explained that the word “country” consists of two characters, “state” and “family,” which represents how the leaders view their roles in looking after their state/family—like strict parents.  So one might say that the Chinese government is run from the top down (like a family) and optimizes for the collective while the American approach is run from the bottom up (e.g., democracy) and optimizes for the individual. (These differences of approach can lead to policies that those on the opposite side find objectionable, which I will explore in more detail in the next chapter.)

As far as how the governance structure works (i.e., who reports to whom in the hierarchy within the central government and how that extends down to interactions with regional and local governments), that has evolved over thousands of years and many dynasties into well-developed approaches that I won’t get into because the digression would be too great.  However what is clear is that there are well-established structures in which the emperor has ministers who are responsible for different domains that extend down to interacting with the provinces and municipalities via a large bureaucracy, and, at the same time, there have always been lots of fights to keep and get control of power by the emperors and the people who report to them.  I was told by Zhiwu Chen, who is one of the most highly respected contemporary Chinese scholars, that 37% of emperors died unnaturally and that more often than not they were killed by the people around them or others in political struggles.[7] Politics in China has traditionally been brutal.

Geographically China is basically one giant plain surrounded by big natural borders (mountains and seas) with a giant population in that plain.  For that reason most of China’s world was within those borders and most wars were for control of it and were fought within those natural borders, mostly between the Chinese themselves, though sometimes between foreign invaders and the Chinese.

As far as wars and the philosophies about them are concerned, the goals have traditionally been to ideally win wars not by fighting but by quietly developing one’s power so that it is greater than the opponent’s so that one can then show it and have the opponent capitulate without fighting. There is also the extensive use of psychology to influence the opponents’ behaviors to produce the desired results.[8] Still there have been numerous violent wars inside of China over the dynasties, though there haven’t been many outside of China.  Those that were outside China were for the purpose of establishing China’s relative power, security, and trade, not for occupation. Scholars believe that China’s lack of significant expansion of its empire outside of China is because the land mass of China is so large that controlling it has been more than enough to handle, because it is has largely been self-sufficient in resources, and because they have preferred to maintain their culture with a purity that is best achieved through isolation.  Unlike other great empires that have conquered and occupied other countries, it was relatively uncommon for China to occupy distant states. Traditionally the Chinese have preferred to enter into relations with empires outside their borders in a manner that is similar to what one might expect from the previously mentioned philosophies—i.e., with the parties knowing their places and acting accordingly and with their places determined by their relative powers. For example, if China is more powerful, which was typically the case in its region, the less powerful states typically paid tribute to China with gifts and favors and in return typically received guarantees of peace, recognition of their authority, and trading opportunities.  These subordinate countries typically maintained their customs and experienced no interference in how their countries were run.[9]

As far as Chinese money, credit, and the economy are concerned, the history is very long and complicated and went through the full range of money/credit/economic systems and cycles that were described in Chapter 2 and its appendix, so what happened in China is basically the same as what happened all around the world through the millennia, though exactly when and exactly how is a bit different. More specifically, inside China like outside China there were the various types of monetary systems used and currencies issued by all sorts of entities with all the systems operating in the ways I described.  Within China, the currency most used through the millennia was metal (mostly copper), and debt cycles like those described in Chapter 2 took place for the same reasons (i.e., debts created buying power so providing them made people feel richer and raised the economy and wealth and were allowed to grow to become much greater than the amount of money needed to service them and the amount of money grew much faster than the amount of goods and services that it could buy).  In these big debt cycles there were stable periods when debt growth wasn’t excessive, bubble periods when debt growth was excessive relative to levels that could be sustained, debt crisis periods when there wasn’t enough money to service debt, and printing of money periods in which money was printed to alleviate the debt crises, which produced hyperinflations.  Internationally (and sometimes domestically) silver was the main metal currency used, though gold was also sometimes used.  As for the economy’s changes, the system went from being primarily agricultural and feudal through many manufacturing incarnations such as the Bronze Age and the Iron Age, including various approaches to trading with foreigners/barbarians (most importantly through the Silk Road), which built a rich merchant class that produced cycles of big wealth gaps and the wealthy having their wealth taken away from them.  Throughout China’s history private entrepreneurial businesses were sometimes allowed, which typically also produced wealth and wealth disparities that led to redistributions of wealth and the businesses and other assets being taking over by the government.  These also occurred in big cycles.  For example, there were an untold number of changes in approaches created and destroyed for the building and the dividing of wealth.  Consistent with China being an intelligent and industrious society, there were many technological inventions created that moved the economy forward.  They occurred in the archetypical ways that were described in the earlier chapters.  While most things were the same, there were some different monetary and economic tendencies in China.  For example, there was a strong tradition of using copper coins, even after China invented paper money in the 9th century and up until the introduction of the yuan in the late 19th century.

The following charts convey some information about how Chinese money and credit passed through these cycles.  As I explained in Chapter 2, “The Big Cycle of Money, Credit, Debt, and Economic Activity,” there are three basic types of monetary systems in which 1) money has intrinsic value (like gold, silver, and copper coins), which I call a Type 1 monetary system, 2) money is linked to assets that have intrinsic value, which is paper money that can be exchanged for gold or silver at a fixed price (a Type 2 monetary system) and 3) money that is not linked to anything, which is called a fiat monetary system (a Type 3 monetary system).  As explained, these have historically changed from one to another as the weaknesses of each become intolerable.  The diagram below conveys an ultra-simplified picture of how these currency systems have rotated through China’s history since the Tang Dynasty.[10] In fact it was much more complicated than this as different parts of China often had different currencies and at times coins and ingots from other countries (e.g., Spanish silver dollars in the late 16th century) that changed more frequently than what is conveyed in the chart.  Still the chart is broadly indicative and meant to show that they had the full range of monetary systems that worked essentially the same as elsewhere in the world, most importantly with the cycles of hard money leading to debt problems leading to the abandonment of hard money leading to high or hyperinflations leading to the return to hard money.

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The chart below shows inflation rates going back to 1750, which reflects the changing value of money.  The periods of relatively stable inflation early on were largely the result of China using metals (silver and copper) as money.  Instead of a central currency being printed, raw weights of metals were exchanged as money (i.e., there was a Type 1 monetary system).  When the Qing Dynasty broke down, provinces declared independence and issued their own currencies through their silver and copper and valued by their weights (i.e., the Type 1 monetary system was retained), which held their value which is why, even during this terrible period, there was not an exceptionally high level of inflation measured in this money.  However debt (i.e., promises to deliver this money) grew in the 1920s and 1930s, which led to the classic debt cycle in which the promises to deliver money far exceeded the capacities to come up with the monies to deliver so there was a default problem, which led to the classic abandonment of the metal standard and the outlawing of metal coins and private ownership of silver.  As previously explained, currencies are used for 1) domestic transactions, which the government has a monopoly in controlling and can get away with them being fiat and flimflam, and 2) international transactions, in which case the currencies must be of real value or they won’t be accepted.  As a rule, the better money is that which is used for international transactions.  The test of the real value of a domestic currency is whether or not it is actively used and traded internationally at the same exchange internationally as domestically.  When there are capital controls that prevent the free exchange of one’s domestic currency internationally that currency is more susceptible to being devalued, which is also why one of the standards for being a reserve currency is that there are no capital controls on it.  So, as a principle, when you see capital controls being put on a currency, especially when there is a big domestic debt problem, run out of that currency.

In China in the mid-1930s two currencies existed—one that was fiat paper that was used domestically and one that was gold and silver that was used for international payments.  The fiat paper one that was used domestically was printed abundantly and devalued a lot, even as the government issuing it controlled less and less territory as it lost the civil war, which is why we see the hyperinflation shown in the chart during that period.  Remember, as a principle, get out of fiat currencies during debt crises and wars because they will be printed a lot to fund debt payments, which will lead them to be devalued and to high or hyperinflation. As shown in the chart below, after the turbulence of World War II and the civil war, in December 1948, the first RMB was issued as a fiat currency that was kept in limited supply to end the hyperinflation.  In 1955 a second issuance of RMB was made, and in 1962 a third was issued.  From 1955 to 1971 the exchange rate was fixed at 2.46 to the US dollar.  From 1972 through the late 1970s, China did a better job of restraining money and credit.  You can see another round of high inflation from the late 1970s to the early ’90s.  It was caused by the global devaluation of money against gold in 1971, global inflationary pressures, China phasing out its price controls, easy credit, and lack of spending controls among state-owned enterprises.  In 1996 convertibility was allowed for current account items but not for the capital account.  From 1997 until 2005 the exchange rate to the dollar was kept at 8.3.  In 2005 the peg with the dollar was ended.

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The charts below show the value of Chinese currency in dollar terms and in gold terms since 1920, plus the inflation and growth rates over this period.  The history for the currency rates is so fragmented before that that it is not worth referencing.  As you can see, there were two devaluations, one at the setting up of the new exchange rate in 1948, and a series of devaluations from 1980 until the early 1990s, largely aimed at supporting exporters and managing current account deficits,[11] which led to the very high inflation during that period.  As shown, growth was relatively fast and erratic until around 1978, then fast and much less erratic since 1978 until the recent brief plunge due to COVID-19.

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Generally speaking the very long and volatile history of markets and economies has given the Chinese, and especially Chinese economic policy makers, the same sort of deep and timeless perspectives about money, debt, and economies as they have for other history. However, that is not totally true.  While it has given most Chinese a strong desire to save and an appropriate sense of risk that innately drives them to save in safe liquid assets (e.g., cash deposits) and tangible assets (e.g., real estate and some gold), most Chinese investors have limited experiences in some riskier assets such as equities and risky debt, so they can be naïve in these areas, though they are learning very fast.  When it comes to policy makers understanding how money, credit, monetary policy, fiscal policy, and the economy work, and how to restructure bad debts, I have found China to have great perspective and to be world-class.


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