Under Marxist ideology, the Chinese economy
was a command-and-control economy eschewing the market mechanism. Mao's
collective farms provide us with a good example. The economy of the U.S.S.R.,
also Marxist, was based on production quotas and fixed prices. They changed by
fiat rather than by changes in demand. State owned, or socialist, productive
enterprises were given quotas based on the prior year's production (plus more).
This push replaced that of producing more to sell more. Any hint of a market brought with it the stench of Capitalism. So
one would suppose that China marked a significant departure when the government
announced in 2013 that it would expand the range in which the yuan currency
would float. Yet in 2019 in the midst of a trade tussle with the United States,
the Chinese state demonstrated just how dominant the state still was relative
to any market system.
The reforms incorporating the market mechanism had begun under
Deng Xiaoping. Although publicly-owned and state-owned-enterprises still
dominated, they were set within a market economy. The mix of government-owned
(i.e., socialist) businesses and a market mechanism has been uneasy in
practice. Private or partially-privately owned enterprises could find it
difficult to compete with competitors subsidized by the state. Widen the circle
to international trade and foreign private enterprises could be found having
the same complaint. Of course, the domestic and foreign consumers stood to
benefit by the subsidized lower prices, so assessing the existence of
state-owned enterprises is more complex than first meets the eye. In part, this
is so because governments tend to emphasize the interests of business rather
than consumers.
The United States, for example, has protested against the Chinese
government devaluing its currency. A low currency means that exports are less
expensive in exported markets. The complaint has been that "a weak
yuan gives Chinese exporters an unfair price edge in foreign markets and helps
swell the massive U.S. trade deficit with China."[1] In the face of the
trade dispute with the U.S. in 2019, China promised in August "to avoid
'competitive devaluation' to hold down export prices in the face of of Trump's
tariff hikes."[2] However, the yuan's low point of 7.0927 on August 23,
2019 was the currency's weakest rate since January 2008.[3] The heavy hand of
the central bank could easily dominant market forces because the bank set the
exchange rate every morning and let the yuan fluctuate only 2% against the
dollar during the day.
Interestingly, the Chinese government had announced in 2013, "The exchange rate is going to be more
market-oriented" [4] People's Bank of China Vice Governor Yi Gang made
this statement on a panel at the International
Monetary Fund’s 2013 spring meeting in Washington. In other words, “China's central bank plans to widen the
yuan's trading band in the near future," he said.[5] This meant that China's leaders would "press ahead with change despite
the surprise slowing of the economy."[6] On the surface, this shows that
the "Communists" were really serious about moving closer to a market
economy. At a deeper level, this shows just how much power the government still
had over its economy--power that could be used to restrict the market in
service to state objectives. In the literature of international political
economy, the Chinese government would be classified as a strong state because
it could resist external pressure. By contrast, six years later, the U.S.
Federal Reserve would lower a key interest rate due to political pressure from
the White House, where concerns of a possible recession in
2020 were intensifying. The weak state classification could also
explain the accumulating federal public debt (i.e., the failure to resist
pressures to tax less and spend more).
From a big-picture perspective, balance or
equilibrium in the global economy is in everyone’s financial interest. Keeping
a currency artificially low is like a dam keeping waters from reaching a
balance. The pressure from the held-up water can be expected to destabilize the
global economy. China’s policy to gradually let the yuan’s value be
market-determined was thus taken to be a prudent step. However, American
frustrations on state subsidies and a low yuan in 2019 suggest that the Chinese
government rather than the market mechanism was still very much in control of
the Chinese economy.
1. Joe McDonald, "China Let Its Currency Sink to an 11-Year Low After
Trump's Trade Threats," Time Magazine, August
26, 2019.
2. Ibid.
3. Ibid.
4. Natasha
Brereton-Fukui and Bob Davis, “China Vows Wider Yuan
Movement,” The Wall Street
Journal, April 17, 2013.
5. Ibid.
6. Ibid.
