A lesson in political economy on investments in China

2 min read
A lesson in political economy on investments in China

Paul Krugman, the eminent Nobel laureate in economics, recalls how companies are different from nations and their reasons. Business managers have different perspectives.

It is economists – not managers – who place the question of foreign trade, the balance of payments and the exchange rate at the center of their reflections.

Since 1989, China and Mexico have experienced rapid economic development, becoming the two main factories for the US. The mechanism turned out to be simple: the countries had benefited from large foreign investments in the perspective of being able to produce at lower costs (the perspective of multinationals).

China and Mexico imported machines that produced the goods for export. Here history separates, Mexico has seen its currency appreciate, has improved its ability to import products and encounter greater difficulties in exports.

By 1994, the season of big Mexican investments was over, investors shed their holdings as the peso depreciated. The Mexican balance of payments was once again positive, as if to say that the economic history of a country resembles a pendulum subject to oscillations and gravity. The basic condition of this mechanism is that the currency can float at free exchange.

China has had a different story, as the hard-rate yuan has maintained a valuation controlled by the Chinese central bank. Domestic consumption did not grow in the desired proportion and so inflation and imports remained at a standstill.

The zero-game accounting principle, of which Krugman speaks, has ensured that the balance between China and the United States in particular has been achieved with the purchase of American government bonds.

It’s like to suggest that a Chinese worker who earns $ 10,000 a year has financed the lifestyle and debts of an American who earns more than ten times.

The control of the exchange rate was functional to the large American consumer goods corporations and to their orders and budget budgets, just think that in the last ten years the value of the yuan has remained unchanged against the US dollar, but the differential of the trade surplus it has been drained by the Chinese government and the Chinese Communist Party to Businesses in Beijing, forging a functional alliance between multinationals and the regime.

The issue of the subtraction of corporate profits was dear to George Soros, who explained the mechanism in the memorable article “China must fix the global currency crisis” in the Financial Times of October 2010.

Our rhetorical creation places two cultured and respectful rivals of the world view, Soros and Krugman, on the same side. China resembles a company rather than a state that rules, monitors and regulates. In practice, play a game with the West with its own rules and if it ever invites you to a table, it is because you are on the menu.

The article was originally published on the Italian language site

Tony Simon

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