Monday, May 24, 2010

Those ingenious Chinese

By 1976, the Chinese government had seen the handwriting on the wall. They saw that China could not become a world power as long as its economy lay mired in communist poverty. Although the Soviet Union was a world power at the time, China saw that a failed economy could not long support military might.

And so China liberalized its economy, allowing free-market principles to generate wealth, not for the benefit of the people, but for the benefit of the ruling elite. It was just a necessary corollary that ordinary people prospered also.

China's bond portfolio is now between a rock and a hard place. The Chinese may be reluctant to buy any more US bonds, but if they refrain from buying, and drive up US interest rates as a result, the value of their current bond holdings will tank. They may try a bluff: threaten not to buy any more US bonds unless Obama introduces some free-market reforms. Communists teaching Obama about the benefits of the free market!

1 comment:

  1. Was that realization a result of President Richard Nixon's visit? Or was that philosophical change already underway, and a cause of the rift between Beijing and Moscow?