Globalization may be the trademark of the 21st century, but in a recent article for FPRI academic Thomas Rawski in part describes how China’s domestic economy, seen from the perspective of its changing monetary instruments, has long been intimately connected, albeit indirectly, with the global economy.
During the Ming period:
The silver mines in Peru are at a high altitude. It took weeks to move the silver from the mines down to the ports. But people were willing to incur the very high costs of carting silver over mountain tracks because traders in China were willing to pay much higher prices for the silver than the Europeans. Most of the silver that was shipped from Mexico through Manila, like the silver that went to Europe, ended up in Asia. Most of that ended up in China, where it fueled economic expansion. We can call this horizontal expansion of the economy. The economy grew, but income levels didn’t necessarily change a great deal.
And in the subsequent Qing period:
In the Qing period (1644–1912), the conventional history of the 19th century is of the Canton trade, with the balance of trade favoring the Chinese and with silver as a result flowing into China, as U.S. currency flows into China nowadays. Then the British discovered a good market for opium in China. They shipped opium from India and the trade balance reversed. This set off events that led to the Opium War. The Qing court discovered that currency outflow, which disturbed them, because just as currency inflow leading to upward pressure on prices lubricates economic expansion, currency outflow, leading to a reduction in money supply and a downward pressure on prices, creates economic problems. Therefore Commissioner Lin is sent to Canton to extirpate the opium trade, not because the court was concerned with the social evils surrounding opium, but because the court wanted to stop the outflow of silver.
Then during the Republican period:
The other sector in which there’s dramatic change in China’s economy prior to WWII is the monetary sector, where you have private Chinese banks, operating under a system of “free banking” with no government regulation, issuing bank notes with no official support (a similar system operated in colonial Hong Kong). Amazingly, these banks persuaded the public to use their notes rather than silver currency, even though the only backing for them was the “faith and credit” of the banks themselves. Under this arrangement, if I was holding Bank of China banknotes and Bank of China went bankrupt, those banknotes were good only as wallpaper. But nonetheless, during the 1920s-30s, there was a big shift from metallic to paper currency, and this again has hugely beneficial effects on trade because it cuts transaction costs.
Some suspect that Chinese central bankers adjust interest rates with partial respect to abacus-related superstitions, set to always be divisible by 9, according to Bloomberg.
Summarizing China’s positions in dollar-denominated investments, Willy Lam writes in an article for China Brief:
[…]Beijing has given subtle hints that it will continue buying American government bonds. With foreign exchange reserves exceeding $1.9 trillion in September, the Chinese government has been looked upon by Western and Asian countries as a “savior’ with deep pockets (Xinhua News Agency, October 14). A late October dispatch by the Xinhua News Agency quoted an unnamed Chinese banker as saying that “American bonds are still a major direction for Chinese [foreign exchange] investments.” The banker added that U.S. treasury bills remained a “safe and stable investment vehicle” (Xinhua News Agency, October 29; Financial Times, October 24).
[…]So far, Beijing has purchased some $600 million of treasury bills, $360 million worth of bonds issued by Fannie Mae and Freddie Mac, and several hundred millions dollars worth of other securities issued by American companies.
