In June 2010, I was standing in Tiananmen Square looking towards the Great Hall of the People. Away to my right, in front of the Forbidden City, was a 12 square foot painting of Chairman Mao. It occurred to me that, even though we think that China has become a capitalist country and a capitalist economy, they are very much a communist country and a communist economy.
In the English-speaking world, economics is now based on the work of Maynard Keynes. In a communist economy, economics is based on the work of Marx and the work of Lenin. China is run by the Chinese Communist Party (CCP). The leaders of the CCP have learnt their economics from reading Marx and from reading Lenin.
Marx and Lenin are two parts of an economic history. This is an economic history of the development of the British economy in the 19th and early 20th centuries. The industrialisation of the British economy, and its progress between 1780 and 1860, is contained in the works of Karl Marx.
Marx emphasised commodities trading. He said that "a commodity, no matter how dirty or filthy, will make money of itself." As well as commodities, Marx also believed in the bond market. He talked about the "sovereignty of the bond holder". When you own the bond of another country, that puts you in a situation of power over that other country. Marx had a very high belief in gold. He said that "gold is the money of the world".
In the Chinese economy, there is a different emphasis on each of those things: commodities, the bond market and gold, compared to a Western economy. In a Western economy, we follow Maynard Keynes. He said that gold is a "barbarous relic". In China, representatives of the Central Bank of China encourage people to own gold.
Understanding the Marxist thinking of Chinese communist leadership allows us to understand why China is an essentially commodities orientated country and also allowed me to understand why China had built up its gold reserves. It has also built up reserves in the bonds of foreign countries and built up an emphasis on trading commodities.
Lenin wrote a book called "Imperialism: The Last Stage of Capitalism". He wrote it during the Great War when he was sitting in Switzerland, being paid by the Germans, and was about to start the Russian revolution. This book is an economic history of the late British empire, from a period of about 1860 to about 1910. It is based on the work of English economic historian J A Hobson.
Hobson talked about how, in the late British empire, Britain spread it's colonial influence not by moving armies or navies around the world, but by investment, and particularly, by investment in building ports and railways. He said that by building these ports and railways, Britain gained strategic influence in these particular regions. More importantly, it gained a service income from providing those ports and railways, and they gained additional exposure to resources in the hinterland of those places.
China has moved from a situation where it's basically a manufacturing economy to being predominantly a service economy, but it's still in a situation where the majority of their export revenue is gained by exporting manufactured products. This is why they have moved to find a source of services income by building ports and railways in other countries. That program is called Belt and Road.
But what China has attempted to do, to support this program, is to make the RMB a reserve currency. This is because Britain, in this period of economic expansion and imperial expansion in the late 19th century, made the pound Sterling the premier reserve currency of the world. China seems to have forgotten that in order to make that possible, Britain had already created important institutions, which China seems to lack. The first of these was an internationally respected central bank. The Bank of England had existed for almost 200 years. It was the faith in the Bank of England which generated international faith in the pound Sterling. Britain had also created an international banking network, to provide services to support trade financed in the pound Sterling.
This article was first published by Morgans.
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