Marx & Lenin still go some way to explaining China’s Economic thinking & behaviour in 2019.
In the English speaking world, economics is now based on the work of John 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 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 bondholder”.
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 “gold is the money of the world”.
Understanding the Marxist thinking of Chinese communist leadership allows us to understand why China is essentially a commodities orientated country and why it had built up its gold reserves. China has also built up reserves in the bonds of foreign countries.
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 its colonial influence not by moving armies or navies around the world, but by investment, particularly in building ports and railways.
He said that by building these, Britain gained strategic influence in these regions. More importantly, it gained a service income from providing these 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 its export revenue is gained from selling manufactured products. This is why it has moved to find a source of services income by building ports and railways in other countries. That program is called the Belt & Road Initiative.
What happens when you have an international confrontation over trade between the US and China? What’s supposed to happen, theoretically, is if a country puts up its tariffs relative to that of another country, its terms of trade will rise.
That means its exchange rate goes up against the country, on which it has increased tariffs. In March 2018, Donald Trump increased the tariffs on imports of Chinese goods into the US. The US dollar should have started to rise, and the Chinese yuan should have started to fall. That’s exactly what happened.
The yuan peaked, relative to the greenback in February 2018, immediately before the US started to put up tariffs on imports of Chinese goods into the US. On average, the yuan has been falling ever since. As it declines, international reserves and international trade finance (which is held in yuan) are being sold and used to buy US treasury bonds.
Since the capital flight from China into US treasuries began in March 2018, we have seen an unanticipated but big decline in US treasury bond yields.
That fall (since the US 10-year bond is the benchmark bond of the world) has led to a decline in all the bond yields in all the countries that have advanced economies. We have seen a dramatic drop in Australian 10-year bond yields, down to a record low yield. This happened slightly after, but a direct result of, the decline in US treasury yields.
These very low levels of bond yields have been caused because of the capital flight from yuan securities into US bonds as a result of the fear engendered by the trade war.
The major effects of the trade war seem not to be on trade but on financial confidence. Loss of financial confidence in the Chinese currency is generating a flight out of yuan securities into US bonds. This has driven down the level of US and Australian bond yields.