Saturday, March 1, 2008

Conspiracy Theory Stalks China-US Financial Relations

As the US subprime crisis has deepened and, since the beginning of this year, begun to affect China’s economy, the Shanghai stock market has slumped while international markets have seen a loss of $7.5 trillion. Is it any surprise that some people, looking over their shoulders, under their beds and behind their doors, begin to wonder whether this isn’t another American conspiracy. Even the odd senior researcher in one or another of China’s most internationalized banks is beginning to cautiously breathe “Conspiracy Theory” to explain the arcane policies of Wall Street, the Federal Reserve and US Treasury. Is it catching?

There can be little doubt that the this fey mood has been encouraged by the vast and worldwide popularity of The Da Vinci Code, Dan Brown’s conspiracy extravaganza, published in 2003, together with the 2006 movie based on it. Far too many readers actually bought its fanciful premise, despite earnest debunkings from almost every respectable quarter. These days, the subject, at least in China, has changed, and “financial conspiracy theory” and “wars of currencies” are sweeping the nation.

Much of this stems from a slight work titled Currency Wars, written by Song Hongbin, a Chinese American scholar, published in China by CITIC Press in May, 2007. According to the press, the book has now gone through 10 printings, reaching a total of 600,000 volumes.

According to Scholar Song in his book, starting in the age of Napoleon, a small group of European bankers began to grow strong, and they gradually gained control of the central banking systems of the UK and the continental countries, later moving across the ocean to America. They played a leading role in setting up a global financial system based on a privately-owned Federal Reserve and international mega-banks. By secretly establishing a wide web of politicians, financiers and media moguls, they grabbed onto huge wealth and are ever working to found a unified global government and currency, which they will, of course, control.

The stories about the American Civil War, World War I, and World War II, which Mr. Song covers, do not particularly impress Chinese readers as they happened too long ago and too far away. But his explanations of the Japanese economic crisis of the 1990s and Asian financial meltdown in 1997 hit much closer to home. Disaster looms, for it is definite by the end of the book that China is the next target in the currency wars launched by this cabal of wicked international financiers.

As could be expected, this titanic story set across a panorama of time and space is filling a vacancy, however vacuously, in the minds of a Chinese people largely ignorant of the history of global finance. Universities in China only began to offer courses in western economics and financial theories in the 1990s and very few people are well versed in these fields. Most who read books of this kind have little understanding of economics and finance.

Currency Wars has become highly popular with that reader on the street who must look for reasons beyond his country’s borders for the macro fluctuations that screw up his life. According to the book, traditional western economic and financial theories are a part of the whole conspiracy. Famous economists, including Keynes, serve the cabal. The book claims that through the influence of icons such as the Nobel Prize for Economics these international bankers have misleadingly transformed true economics, a subject which ought to be “profit” oriented, into a confusing and camouflaging mass of mathematical formulas.

And as for “profit,” according to Marxist economics, which every Chinese student has drilled into her head, everything that capitalists do is motivated by their desire for the surplus value they alone can capture. This is what it’s all about. The book claims that international bankers will do everything possible, confusing the masses and even launching a war, for the sake of that profit.

This great conspiracy thinking became very popular in China during 2007. The reasons are manifold.

First, 2007 was the 10th anniversary of the Great Asian Financial Meltdown, a crisis which still lacks, to the uninformed mind, a reliable explanation. George Soros remains, if not exactly Satan, the Beelzebub of the conspiracy in China.

Second, with state-owned bank reform in 2004 and RMB exchange rate reform in 2005, China has become more open to international financial forces, and financial security problems have become a hot issue. The selling of shares of state-owned banks to foreign companies, the repugnance to America’s demands for appreciation of RMB, and insufficient confidence in domestic financial institutions all become good soil for financial conspiracy theories to take root.

Third, the American sub-prime crisis spreading across the world from the second half of 2007 is just too convenient not to be a big part of and the next step in this conspiracy.

These theories of outsider financial conspiracy greatly affect many Chinese people, ranging from netizens and ordinary people up to top leaders. Many officials even ask their subordinates to read Currency Wars as homework.

There are those Chinese scholars who have written rebuttals of the book. Fred Hu (Zuliu), general manager of Goldman Sachs in China, issued an article titled An Imaginary Currency War, which brought him huge opprobrium, as his professional position screamed out to many that he was, if not a member of the conspiracy, at least a tool. Others, professors and those familiar with economics and finance, also entered the fray, but each voice was soon engulfed, especially if the writer had had the temerity to have studied abroad.

Naturally, such disputes have done nothing to dampen sales of the book.

Conspiracy theories tend to fade as time goes by and nothing further happens, while disputes keep them on the jump. The sub-prime crisis since the second half of 2007 has drawn people’s attention and makes them wonder.

First of all, the crisis seemed to come from out of the blue, even for Chinese economists. Secondly, for most Chinese it is close to unbelievable that any such event could have so huge an effect as to smite even an economic giant like the US, along with most of the world’s financial markets, even while the Federal Reserve has launched a rare and radical interest rate reduction? Conspiracy theory seems to cover the crisis nicely.

Leaving out Currency Wars, even some researchers experienced at overseas investment hold similar views. Tan Yaling, global financial market researcher for the Bank of China and well-known analyst in the financial media, published a long article with the title Beware of USD Depreciation and Sub-prime Conspiracy, claiming that China may have entered an American trap. The bank has bought near US$ 8 billion sub-prime mortgage backed securities and related products.

Tan Yaling believes that the depreciation-appreciation-depreciation process of the dollar is purposely designed. Through the quick depreciation of the dollar, America is able to weaken the Euro area economy, as well as RMB, which may be seen as a threat in the future, and its own double deficit problem can be gradually resolved. As the appreciation range of RMB is smaller than that of the euro, the US manages to create hostility between the euro area and China, so Europe will also pressure China to allow the RMB to appreciate.

Tan Yaling figures that the US may shift its crisis to developing countries in a strategic way and therefore solve developed countries’ problems by utilizing flaws in developing countries’ financial and market systems.

If nothing else, disputes over such conspiracy theories bring the processes of China’s opening up of its financial market out into the open. Sufficient debate over this problem may actually help China to realize and participate in the global financial system.

But for responsible, authoritative, internationally savvy economists to indulge in such claptrap does a disservice to their field and themselves. China’s policy makers must interpret the current complicated issues using the knowledge and the experience they and their international colleagues have hard-won. China’s financial reform and opening up is difficult enough without doubts arising from half-baked best-sellers.

byCSC staff

No comments: