Currency Wars_ The Making of the Next Global Crisis - James Rickards [54]
In the late 1980s, China suffered a significant bout of inflation, which prompted popular discontent and a conservative backlash led by old-guard communists against the economic reform and opening programs of Deng. Separately, a liberal protest movement, led by students and intellectuals seeking democratic reform, also contributed to political upheaval. These conservative and liberal movements collided violently and tragically in the Tiananmen Square massacre of June 4, 1989, when People’s Liberation Army troops, acting on orders from the Communist Party leadership, used live fire and tanks to clear human rights and prodemocracy protestors from the square in the center of Beijing adjacent to the old imperial Forbidden City. Hundreds were killed. There was a slowdown of the Chinese economy after 1989, partly as a result of efforts to curb inflation and partly as a foreign reaction to the Tiananmen Square massacre. This pause proved temporary, however.
In the 1990s, China finally broke the “iron rice bowl,” the welfare policy that had previously guaranteed the Chinese people food and some social services at the cost of slow growth and inefficiency. Something resembling a market economy began to appear, which meant that Chinese workers had the opportunity to do better for themselves but had no guaranteed support if they failed. The key to this new social contract was the steady creation of millions of jobs for the new job seekers. With memories of Tiananmen fresh in their minds and the historical memory of over a century of chaos, the leadership knew the survival of the Communist Party and the continuation of political stability depended on job creation; everything else in Chinese policy would be subordinate to that goal. The surest way to rapid, massive job creation was to become an export powerhouse. The currency peg was the means to this end. For the Communist Party of China, the dollar-yuan peg was an economic bulwark against another Tiananmen Square.
By 1992, reactionary elements in China opposed to reform again began to push for a dismantling of Deng’s special economic zones and other programs. In response, a visibly ailing and officially retired Deng Xiaoping made his famous New Year’s Southern Tour, a personal visit to major industrial cities, including Shanghai, which generated support for continued economic development and which politically disarmed the reactionaries. The 1992 Southern Tour marked a second-stage takeoff in Chinese economic growth, with real GDP more than doubling from 1992 to 2000. However, the effect of this spectacular growth in the 1990s on U.S.-China economic relations was muted by the continuing U.S response to the Tiananmen Square massacre, which included economic sanctions and a general cooling of direct foreign investment by U.S. firms in China. A series of blunders and miscalculations, including the firing of a NATO cruise missile at the Chinese embassy in Belgrade in 1999, served to increase tensions. Economic relations were kept in an adversarial state by the April 2001 collision of a Chinese jet fighter with a U.S. reconnaissance plane, killing the Chinese pilot and causing the emergency landing of the U.S. plane on Chinese territory and temporary imprisonment of the crew.
Ironically, it was the al-Qaeda attacks on September 11, 2001, and China’s resulting firm support for the U.S.-led global war on terror that finally broke the ice and helped U.S.-China relations get back on track. Despite almost twenty-five years of significant economic progress by China, beginning in 1976, it was only in 2002 that U.S.-China bilateral trade and investment codependence kicked into high gear.
That year, 2002, also marked the beginning of Fed chairman Alan Greenspan’s experiment with sustained ultralow interest rates. Greenspan had started