The coming Renminbi revolution

Napoleon was only half-right when he warned more than two centuries ago that, “China is a sleeping lion. Let her sleep, for when she wakes she will shake the world.” China has woken up and is indeed shaking the world. But it is shaking the world gently. Why?

Chinese history has mirrored that of Europe. Until the Industrial Revolution, the European elites lived well while the masses suffered brutish conditions. The Chinese masses, by contrast, suffered the same plight until as recently as 1978. After that year, when Deng Xiaoping launched the Four Modernisations Programme, China experienced the greatest uplift of the human condition in history: 800m people were rescued from absolute poverty. Infant mortality plummeted. Virtually every child in China goes to school today.

How did China accomplish this? It made a massive U-turn. In the past, China built great walls and shut itself in. In 1978, China’s economy opened up and integrated itself with the world. An even more momentous decision was to join the WTO in 2001. The subsequent explosion of the Chinese economy was phenomenal. In 2000, America’s economy was 8.5 times that of China. By 2015, it was only 1.6 times larger. Within a decade, China is likely to have the world’s largest economy.

So China will indeed shake the world, but it will do so gently. For it has succeeded by integrating itself into the global and multilateral rules-based order that the west, especially America, gifted to the world at the end of the Second World War. The ecosystem of global multilateral institutions has facilitated China’s rise. China is now the number one trading nation of the world and over 100 countries list China as their number one trading partner. China will therefore work hard to preserve the global rules-based order. Xi Jinping declared this loudly and clearly when he spoke at Davos in January 2017.

A resurgent China that plays by western-designed rules should, in theory, be welcomed by America. Sadly, America is shooting itself in the foot by becoming more aggressively unilateral when it should become more multilateral. To put it bluntly, every shackle of multilateral rules that the world’s current number one power, America, accepts for itself is a shackle that will be passed on to the next number one power: China. The reverse is also true. Every loophole that America creates for itself today is a loophole that China will use tomorrow.

Even if the world will only be shaken gently, some multilateral rules and practices will change to accommodate its rise. It is written in the IMF constitution that the organisation must be headquartered in the capital of the world’s largest economy—America will experience its first bit of pain when the IMF shifts its HQ to Beijing. The IMF may even get its first non-European boss—since the creation of the IMF and World Bank in 1945, there has been an unwritten rule that the head of the IMF must be European and the head of the World Bank is American. Such anachronistic rules and practices will have to go.

Traditionally, the global reserve currency has been that of the top economic power too. This is why the US dollar has reigned supreme for a century. This also confers on America an “exorbitant privilege.” Chinese workers have to toil to produce goods to export to America. China gets US dollars in return. To make good use of these dollars, it loans them to the American government by buying US Treasury bills. And how does the American government return these Chinese loans? It uses its printing presses to print dollars. Chinese toil is repaid with made-up American money. What happens when the US loses this privilege, as it inevitably will?

America has also developed a careless and often thoughtless instinct to punish other countries with sanctions. Even its allies have not been spared. British banks were fined when they financed exports to Iran. International law was not breached, but as these banks used US dollars, they ran afoul of US law. Imagine a world where China copies this American practice. Clearly, it would be an uncomfortable place.

This is why both America and Europe have to wake up now and ask themselves a simple question: which aspects of their international behaviour would they like China to replicate when China it becomes the world’s top dog? And which aspects would they like China not to replicate? Harvard professor Graham Allison has noted that Americans enjoy lecturing the Chinese to be “more like us.” He then advises his fellow Americans to be more careful what they wish for.

Many Americans also wish that China could become a democracy immediately. Here too they should be careful. A more democratically elected leader in China will have to pay more heed to popular sentiment. As China rises, so does the tide of nationalist sentiment. The Chinese Communist Party is currently delivering a global public good by carefully restraining Chinese nationalism. The meritocratically selected leaders of China can and do exercise caution in China’s international behaviour—democratically elected leaders would have greater difficulty.

In sum, let us hope that China will continue with its current practice—of only gently shaking the world as it rises.