The next credit crisis poses a major challenge to China’s manufacturing-based economy, because higher global and yuan interest rates are bound to have a devastating effect on Chinese business models and foreign consumer demand. Dealing with it is likely to be the biggest challenge faced by the Chinese Government since the ending of the Maoist era. However, China does have an escape route by stabilising both interest rates and the yuan by linking it to gold.

But will the Chinese have the gumption to take it? This article examines the challenges and the possible solution. It concludes there is a reasonable chance China will embrace sound money, because it is in a position to do so and the dangers of not doing so could destroy the State.

Are the Chinese Keynesian?

We can be reasonably certain that Chinese government officials approaching middle age have been heavily westernised through their education. Nowhere is this likely to matter more than in the fields of finance and economics. In these disciplines there is perhaps a division between them and the old guard, exemplified and fronted by President Xi. The grey-beards who guide the National Peoples Congress are aging, and the brightest and best of their successors understand economic analysis differently, having been tutored in Western universities.

It has not yet been a noticeable problem in the current, relatively stable economic and financial environment. Quiet evolution is rarely disruptive of the status quo, and so long as it reflects the changes in society generally, the machinery of government will chug on. But when (it is never “if”) the next global credit crisis develops, China’s ability to handle it could be badly compromised.

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