Economic Boom, Boom, Boom

Throughout the 1980’s China emerged as a player: largely through the strength of its huge population and low wages. This was entirely acceptable to the West, and in many circles seen as highly desirable. The thought being that China could be engaged in basic trade first and then values second. With their primitive infrastructure they posed no threat to the “real” economic powers. However, while the Chinese Communist Party artificially controlled foreign exchange rates, they reinvested foreign currency reserves in industrial modernization and technology acquisitions through the 1990’s, leading to more modernization, and more technology, better efficiency, and bigger trade surpluses. In the process they created a Communist State unlike anything envisioned by Marx, Lenin or Mao: one having huge trade surpluses that has in turn created a middle class, and as recently reported, even a large number of billionaires. Milton Friedman is no doubt smiling from on high (and yes, if there is a heaven, Milton is there) saying “I told you so.”

All of this has not been without a price to the West. While China has been a keen producer of finished products, and a proven marketer of those goods, it has not been as efficient when it comes to producing raw materials. Basic energy reserves have eluded the Big Red Machine. Recent rises in oil prices were partially attributed to the new industrial powers vying with the old guard. Yes, demand exceeding supply continues to drive up prices.

All of this may change. Recently China announced plans to take advantage of its huge foreign exchange reserves to expand its stock of natural resources. The vice prime minister, Zeng Peiyan told leaders of the national legislature that the government planned to step up exploration for crucial resources like oil, gas and coal. Wow! (Boom!) China with its own stock of energy would be a competitor extraordinaire. A bigger Wow! (Boom! Boom!) - China expanding the world’s reserves could lower overall energy costs for everyone by reducing pressure on the supply side. But an even bigger Wow! (Here's the Boom! Boom! Boom!) – Communist China with a savvy knowledge of how free markets work, a population advantage (call that potentially the world's largest consumer market), coupled with a predisposition to central control now having the ability to strongly influence world energy prices while keeping its own domestic prices, and hence manufacturing advantage, artificially low. This could be the West’s worst nightmare coming true: economic warfare with the communists.

Nikita Krushev said “We will bury you economically.” By “we” he no doubt meant the Russian Communist Party. Little did he know that when the realizations of such prophesy at least had the potential to occur that the Soviet Union would no longer exist and that its former poor cousin, The Peoples Republic of China, would be The World Communist Party.

The time has come for the West to make some simple demands - that the playing field be leveled. We can no longer compete, nor should we, against controlled markets. The time has come for the yuan to float on world currency markets and that China's domestic markets become truly free. No central control. It makes great political rhetoric to talk about bringing China to the table through trade, but these guys have learned too well without paying the price of entry. Exxon, Toyota, Wal-Mart and GM together are no match for a fortress China.