Wednesday, November 18, 2009

Confrontation With China Is Likely

Martin Wolf, a high-level spokesman for Western finance capital, tosses a few logs on the fire:

"We have spent long enough discussing China’s exchange rate policies. It is time for action."

Krugman joins in:

"The problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways."(2)

IMF Managing Director Dominique Strauss-Kahn, as well:

"We do believe firmly in the IMF that the renminbi is undervalued, and that it is not only in the interests of the global economy but also in the interests of China to have revaluation of the currency."

It's doubtful this will come to a happy ending for all sides. Overcapacity in capitalism is resolved through the liquidation of competitors (war or mass bankruptcy) or expansion of markets (the end of communism, for one). There is a problem with overcapacity - a very typical Marxian crisis of overproduction - that has been fermenting for decades. As Justin Lin of the World Bank said in July: "Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted".

China needs a trade surplus to recycle money back into its banking system, which has quite a lot of bad loans, and many more coming. You can't built unoccupied cities without having vast amounts of non-performing loans. And, as is often mentioned, export-industry employment is maintained through a devalued currency. This is why Beijing will do what it wants with the yuan. The Western financial elite considered the destruction of its working class a loss-leader to open up China and crack its banking system. This has not happened, and the dream is gone now that the West is riddled with its own banking crisis.

Meanwhile, China has used the crisis to bolster its dominance in world markets, and this is not going to go unchallenged. It could lead to military confrontation.

For all the talk of democracy and rights, the Western ruling class is not far removed from World War, slavery, imperialism and nuclear attacks. China's government was rather naive to buy billions in worthless paper from the US government, and they should not be so naive to forgot history.

1"Grim truths Obama should have told Hu" - Financial Times; Wolf
2"World Out of Balance" - NYT; Krugman
3"IMF chief urges China to let yuan rise" - AP
4"World Bank warns of deflation spiral" - UK Telegraph; Ambrose-Pritchard
5"Cracking China's Banking System" - previous post

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