CHINA: the New Leadership Risks its Future on the Flip of a Coin

In the path towards the internationalization of the Renminbi,  there lies the risk of entering into a dead end street. Both the purely economic and the socio-cultural reasons  could endanger China if its political lever does not adequatedly direct its trade policy. Unlike in Europe, where the prevalence of politics is dilluted, both in Washington and Beijing politics are always present, as political levers steer and control the respective markets. China, in particular, maintains a unique rigor, the capacity to tighten or loosen the reins over its economy. Ironically, in the globalized arena, China has asserted an effective intervention over its national priorities. Thus, if the main obstacle is political, only from that perspective can the RMB be rooted in its internationalization. There is, in fact, an independent monetary policy, an independent central bank, and significant freedom of capital. Gone are the days of administered prices, but they are not yet mature in terms of currency fluctuation according to market logic. The RMB is now more elastic, and its value has drastically increased compared to the dollar. The U.S. position  —in terms of the trade balance which China, quite different from the one in previous years— seems more responsive to the politics of the election campaign, than to a purely economic evaluation. Yet, distrust of the yuan remains. It has not maintained its real value in relation to the markets; instead, it reflects Beijing’s control over its value. The question, therefore, is: can China handle a new and complex situation? And this is the knot that the new Chinese leadership will have to untie. It is likely that the new leader, impacted by the differing voices within the CCP, could initially be weak. At first, he will probably have to continue to mediate among the party factions, but later he will attain the power to make serious decisions. China cannot continue to capitalize on its strength without being both respected and feared. To do so, China must open its market, especially the capital sector. This internationalization represents a benchmark that cannot be postponed. On the other hand, exposing China to the winds of the financial markets could lead to a serious illness. The country is not used to economic liberalism, to the interplay of supply and demand, and especially it is not inclined to relinquish central control. It is incomprehensible to Beijing what is currently happening in the European states, who are losing their sovereignty because of decisions made far away from their domestic capitals. The Chinese fear of instability is now added to their already strong economic nationalism. In a sort of primal instinct for survival, the demand is that the value and destiny of the Renminbi should remain in Beijing, leaving nothing to foreign interference. It is in this crossroads that the fate of the Chinese currency will be decided. If the leadership accepts the challenge, we will have a more balanced and comprehensive globalization; but if  doubt prevails, China will be perceived as not yet ready for internationalization, and will continue to be seen on the basis of its quantitative model.