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China's Belt and Road Initiative (BRI) ("the New Silk Road")

POSTED BY: SIGNYM
UPDATED: Tuesday, June 12, 2018 03:35
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Tuesday, June 12, 2018 3:35 AM

SIGNYM

I believe in solving problems, not sharing them.


I've been watching China's fiscal and economic policies for a while. They (with Russia) constructed an entire parallel financial system, including international banks, a "petro-yuan", gold exchange, and non-SWIFT electronic transfer, leaving them and their clients invulnerable to USA sanctions. At the same time, they applied with the IMF to be part of the SDR. They've blown a huge hole in their budget, extending credit like crazy - first, to building infrastructure that nobody needed (China's "ghost cities" and highspeed trains to nowhere) and then on the Belt and Road Initiative.

What were they trying to do? Employ their people for political stability? Take over the IMF? Become the new international currency? "Develop" the hinterlands of Africa and C/S America in return for agricultural and mineral resources?

And then, it struck me ... China is engaging in a GIANT, worldwide, public works program, much like FDR's during the Great Depression. At that time, FDR blew a huge hole in HIS budget in order to employ the unemployed, and get them to work doing something useful. The idea was that injecting money into the bottom of the economy would cause an increased demand, which would employ more people, causing further increase in demand: creating a "virtuous cycle" to counteract the "vicious cycle" which began in 1929 when credit collapsed. (As a historic note, the program began working; however Republicans in Congress grew nervous about the unbalanced budget and clipped the funding, leading to a "min-recession" in 1933.)

China is doing the same thing with its BRI, but with the complication that they have to act across the globe and deal in different currencies. In FDR's case, he could disburse dollars with the knowledge that not only WOULD they be spent in the USA (There wasn't as much importation back then) they COULD be spent in the USA because dollars would be accepted everywhere.

But look at the current situation from China's POV: Sure, they can pay for steel, concrete, and labor with yuan, but what can the recipients of the yuan DO with those yuan? China of course will accept it's own yuan for manufactured items (and that's no small potatoes) but you can't buy oil or gold or food on the international market with yuan because the yuan isn't (or wasn't) an international trade/reserve currency.

So China has done everything possible to make the yuan an acceptable and valuable currency for international trade: You can buy oil directly with the yuan, and you can buy gold with the yuan, and between the two you SHOULD be able to buy just about anything with the yuan. This applies to nations under sanction by the USA/west. But, of course, if you want to go thru the IMF the yuan is also part of the SDR, so China has both camps covered.

It's a little more difficult to figure out what China wants to get from creating a world-straddling public works program.

Like FDR, part of that may have been for political stability. China believed that its road to prosperity was along the same path that Japan, Taiwan, and S Korea took: Export to the USA starting with cheap goods (in this case, destined for Walmart) and parlay those earnings into a diverse and high-tech manufacturing base, ranging from industrial chemicals to satellites. 2008 was a big wakeup call, when demand for Chinese goods suddenly dropped out of sight. The Chinese leadership at the time said that they needed to increase demand at home .... become a "consumer" economy. I believe that they attempted to do that by increasing credit in a rather indirected fashion, but all THAT did was cause a rush of real estate and commodity (steel, aluminum, soybeans) speculation and create a huge wealth gap in China.

So rather than just reduce the interest rates or loosen the rules on shadow banking, the Chinese government decided on this public works program for at least two reasons:

1) It keeps the people at home busy and content, and
2) Instead of just blowing speculative bubbles, the BRI has a real chance to actually create a real return, as recipients improve their own economies.

The better analogy would be to the Marshall Plan, but that's another story. Anyway, if you already figured this out, I apologize for boring you with this post.

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