Days after Congress passed the Hong Kong Human Rights and Democracy Act last week [with a score of almost communist party discipline], Beijing vowed to take countermeasures if president Trump signed the document. Beijing left out specifics, fueling concerns that China would pull out of trade negotiations with the US. But after Trump signed the bill on Wednesday, Beijing only released a strong verbal protest. They would have been better off saying nothing. It would have made Western analysts raise their eyebrows and maybe shudder a little…
To save face, Chinese officials are gambling that Trump won’t de facto implement the HK bill’s measures. More to the point, Beijing emphasized the [president’s] “constitutional authorities with respect to foreign relations” line in the bill. I don’t see how this type of logic is convincing, given the fact Congress is nearly unanimous in its support of the HK bill.
Commentators have stressed that both sides have incentives to keep the Hong Kong issue and the US-China trade talks separate, and that both are interested to sign a deal. The fact that Beijing did not escalate is evidence that the US has more leverage over China than vice-versa. I explained this on former occasions. For decades, China has been a net exporter of physical wealth. During this time, it has accumulated net US reserve balances, which it has used to purchase strategic materials and technology according to her goals, but China also moved its dollars from its checking account at the US central bank, to its saving account at the same bank [buying US treasuries with US reserves]. In the world of financial analysts who are still stuck in the pre-industrial age and have yet to enter the epoch of fiat and endogenous money, these analysts called referred to China as America’s creditor. Not only is this utterly untrue, mechanics-wise, it was US consumers who financed China, ensuring demand for Chinese exports [profits for Chinese export firms and wages for Chinese workers in these export enterprises].
If I buy an interest-bearing bond with USD from the US Federal Government that spends and taxes in USD currency, in no way am I “crediting” that Government or providing it with funds to spend. I’m simply parking my liquidity for a specific time window, and after that time has passed, I’m getting paid my original sum plus a little interest. A sovereign selling bonds is a liquidity drain operation. While a sovereign making bond payments is a liquidity fill operation. The creditor narrative would only be accurate, if I were to buy that state bond with a foreign currency, and the bond would mature in foreign currency – in other words, the narrative is accurate only when a Government is raising money and spending money in foreign currency [not its own].
If US-China relations were to reach abysmal levels, Washington would order the US central bank to freeze China’s saving and checking accounts [or it could only freeze the latter, while allowing the former to acquire interest, just like it did with Iran’s account]. In effect, rendering China’s past toil of exporting net [physical] wealth to the USA in exchange for net US dollars useless. True, without affordable Chinese consumer and input goods present on the US market, that will definitely cause prices to rise for US firms and households, but as new exporters to the US would move in to fill the gap, price levels would stabilize. The bigger concern for the Americans in my view is its export enterprises. In this scenario, with the Chinese market gone for them, they’ve no choice but to try and enter some other markets to try and sell their wares. But they’d have a tough time doing it on their own. They’d have it far easier if the US Federal Government greenlighted US dollar loans to partner countries, with the rule that this money can only be used to buy US goods from specific US sectors.
The situation in Hong Kong will shrink in heat only after a trade deal is signed between Washington and Beijing. Until then, the West is going to keep the protesters going. China has very little room to maneuver on this issue. They’ll have to cooperate with the Western neoliberal establishment, which, ironically, gave them huge boons. The strong ties between US trans-national capital and the CCP should not be praised, instead, they should be viewed with the utmost circumspection. And I don’t like the route Xi Jinping has taken with regard to abolishing term limits, the reeducation camps, and the social credit score system. If anyone thinks they can win a free trade game in laissez-faire circumstance, while competing with state-sponsored enterprises, built on time-tested schemes to work, please be my guest. It won’t be long until you file Chapter 11 or receive a nice buyout offer from the competition. The New Silk Road project can only work well if SOVEREIGN states take part in it. But if it’s composed of vassal states, it’s going to be a huge flop.