China’s central bankers cannot just ignore the political side of their massive US debt holdings
Lanxin Xiang 12 March 2010
For the first time, China’s central bank has had to defend its handling of the huge sum of US debt it holds. In a recent National People’s Congress session, Yi Gang, director of the State Administration of Foreign Exchange (Safe), seemed rather uncomfortable when grilled about why more than 60 per cent of China’s reserves are in US dollar assets that have exceedingly low returns. Yi refused to provide exact figures, asserting simply that the matter was a “pure market operation” and “it should not be politicised”.
Using technicalities to cover up failures in policy decisions reflects an arrogant assumption by the People’s Bank elite - Yi is a vice-governor of the bank - that foreign exchange management is too complicated a subject for ordinary citizens to understand.
But Yi can hardly get off the hook that way. What audience did he have in mind for his comments? He was apparently sending an official reassurance to the US Treasury that Beijing would never use the debt issue as a foreign-policy instrument. Even more importantly, it was aimed at placating domestic dissatisfaction with the central bank’s unwise decisions to acquire, in a very short time span and with no transparency, a huge pile of dollars to the detriment of the Chinese economy.
This is the first time since 1948 - when the Kuomintang regime collapsed amid a hyperinflationary monetary policy - that the population has become concerned about the government’s management of foreign exchange matters. The people have good reason to be worried: after all, foreign exchange reserves are derived from Chinese workers’ sweat and blood. It would not be impossible to lose these assets, since the American government keeps printing dollar bills to cover its astronomical deficits.
Also widespread is speculation about whether Beijing’s monetary elite have benefited from their extraordinary passion for dollar assets. In a country where kickbacks and other forms of official bribery are common practice, few believe the central banking system is immune from corruption. The central bank’s claim that dollar assets remain the best investment choice is ill-received at home, since it defends the failed Washington Consensus and snubs the idea of “socialism with Chinese characteristics”. The people seem to receive no tangible benefit when trade surpluses are used to finance another country’s bad spending habits. Chinese central bankers are out of step with popular sentiment: the monetary policy group is the most westernised of intellectual cliques. Their academic background is uniformly rooted in textbooks on neoliberal economics, even among those trained at home.
Collectively, they are proud to be called the “Fifth Avenue” monetary elite, named after the first graduate school for monetary studies created by the People’s Bank in the early 1980s. It is located in Wudaokou, literally “the entrance to Fifth Avenue”, Beijing’s financial district. Its textbooks are mainly American. Many of its graduates have been running the foreign exchange operations, including two of Yi’s predecessors at Safe. This elite group claims to hate politics and to be uninterested in international political relations, truly believing market mechanisms can solve all problems.
During the Mao Zedong period, the People’s Bank was no more than the government’s cashier-in-chief. It had little experience in international finance and monetary politics.
China did not take part in the post-war international monetary system and had no operating knowledge of the rise and fall of the Bretton Woods system - the rules for commercial and financial relations among the world’s major industrial states after the second world war. Naturally, the political economy of the US dollar and its role in international politics was never part of the Fifth Avenue curriculum.
Trained in the United States, Yi’s neoliberal view is not surprising, but the call to depoliticise the US debt issue is misguided if not utterly naive: above all, because the American side never stops politicising this issue.
US President Barack Obama’s chief economic adviser, Larry Summers, has described the Sino-US debt relationship as a “financial balance of terror”. The US Treasury never leaves politics out of policy considerations. The Chinese central bankers may have read John Maynard Keynes’ The General Theory of Employment, Interest and Money, but they never understood Keynes the man. Throughout his professional career, Keynes fought many battles over monetary politics, both on the domestic and international stages.
If Yi and his colleagues were to read a major biography of Keynes, they might regret their public blurt about “depolitising”. It will not be taken seriously at the politics-conscious US Treasury and will further alienate popular sentiments at home.
Beijing has to be cautious with the debt issue, for it must maintain a balance between its ties with Washington and the defence of its core interests. Yi’s statement has not helped Beijing’s cause. Instead, it may come back to haunt the central bankers if things go wrong with US assets in the near future.
Lanxin Xiang is professor of international history and politics at the University of Geneva
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China’s central bankers cannot just ignore the political side of their massive US debt holdings
Lanxin Xiang
12 March 2010
For the first time, China’s central bank has had to defend its handling of the huge sum of US debt it holds. In a recent National People’s Congress session, Yi Gang, director of the State Administration of Foreign Exchange (Safe), seemed rather uncomfortable when grilled about why more than 60 per cent of China’s reserves are in US dollar assets that have exceedingly low returns. Yi refused to provide exact figures, asserting simply that the matter was a “pure market operation” and “it should not be politicised”.
Using technicalities to cover up failures in policy decisions reflects an arrogant assumption by the People’s Bank elite - Yi is a vice-governor of the bank - that foreign exchange management is too complicated a subject for ordinary citizens to understand.
But Yi can hardly get off the hook that way. What audience did he have in mind for his comments? He was apparently sending an official reassurance to the US Treasury that Beijing would never use the debt issue as a foreign-policy instrument. Even more importantly, it was aimed at placating domestic dissatisfaction with the central bank’s unwise decisions to acquire, in a very short time span and with no transparency, a huge pile of dollars to the detriment of the Chinese economy.
This is the first time since 1948 - when the Kuomintang regime collapsed amid a hyperinflationary monetary policy - that the population has become concerned about the government’s management of foreign exchange matters. The people have good reason to be worried: after all, foreign exchange reserves are derived from Chinese workers’ sweat and blood. It would not be impossible to lose these assets, since the American government keeps printing dollar bills to cover its astronomical deficits.
Also widespread is speculation about whether Beijing’s monetary elite have benefited from their extraordinary passion for dollar assets. In a country where kickbacks and other forms of official bribery are common practice, few believe the central banking system is immune from corruption. The central bank’s claim that dollar assets remain the best investment choice is ill-received at home, since it defends the failed Washington Consensus and snubs the idea of “socialism with Chinese characteristics”. The people seem to receive no tangible benefit when trade surpluses are used to finance another country’s bad spending habits. Chinese central bankers are out of step with popular sentiment: the monetary policy group is the most westernised of intellectual cliques. Their academic background is uniformly rooted in textbooks on neoliberal economics, even among those trained at home.
Collectively, they are proud to be called the “Fifth Avenue” monetary elite, named after the first graduate school for monetary studies created by the People’s Bank in the early 1980s. It is located in Wudaokou, literally “the entrance to Fifth Avenue”, Beijing’s financial district. Its textbooks are mainly American. Many of its graduates have been running the foreign exchange operations, including two of Yi’s predecessors at Safe. This elite group claims to hate politics and to be uninterested in international political relations, truly believing market mechanisms can solve all problems.
During the Mao Zedong period, the People’s Bank was no more than the government’s cashier-in-chief. It had little experience in international finance and monetary politics.
China did not take part in the post-war international monetary system and had no operating knowledge of the rise and fall of the Bretton Woods system - the rules for commercial and financial relations among the world’s major industrial states after the second world war. Naturally, the political economy of the US dollar and its role in international politics was never part of the Fifth Avenue curriculum.
Trained in the United States, Yi’s neoliberal view is not surprising, but the call to depoliticise the US debt issue is misguided if not utterly naive: above all, because the American side never stops politicising this issue.
US President Barack Obama’s chief economic adviser, Larry Summers, has described the Sino-US debt relationship as a “financial balance of terror”. The US Treasury never leaves politics out of policy considerations. The Chinese central bankers may have read John Maynard Keynes’ The General Theory of Employment, Interest and Money, but they never understood Keynes the man. Throughout his professional career, Keynes fought many battles over monetary politics, both on the domestic and international stages.
If Yi and his colleagues were to read a major biography of Keynes, they might regret their public blurt about “depolitising”. It will not be taken seriously at the politics-conscious US Treasury and will further alienate popular sentiments at home.
Beijing has to be cautious with the debt issue, for it must maintain a balance between its ties with Washington and the defence of its core interests. Yi’s statement has not helped Beijing’s cause. Instead, it may come back to haunt the central bankers if things go wrong with US assets in the near future.
Lanxin Xiang is professor of international history and politics at the University of Geneva
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