But is the fear of immediate hyperinflation realistic?

In our opinion, for those living in at the very least reasonably developed nations, the answer is a clear no.

Why?

Simply because there is no precedent out there which involves a prosperous nation being brought to its knees by hyperinflation.

When hearing this argument, many observers are quick to point to Germany but that is not an accurate example, for the simple reason that Germany was anything but a prosperous nation at that point in time. On the contrary, it had to make debilitatingly high payments to other nations as war reparations and its economy wasn’t exactly booming.

To put it differently, the economy of Germany had already been brought by its knees by losing World War I, it wasn’t hyperinflation which was responsible for that. Hyperinflation simply placed the final nail(s) in the economic coffin of Germany, bringing about disastrous consequences for an already-weakened economy. Again, “already-weakened” is the operative term because no, it is impossible to draw a parallel between the economy of Germany after losing World War I and the economy of today’s Germany.

The same way, examples such as Zimbabwe make it clear that hyperinflation (up until this point, at least) was only a threat to economies that were already weak to begin with.

As such, it would be quasi-irrational for someone living in today’s Germany to fear immediate hyperinflation. Not because hyper-inflationary scenarios are impossible but rather because they would most likely have to be preceded by other scenarios which weaken the Germany economy to enough of a degree for it to become a “candidate” for hyperinflation.

What about China?

In light of the fact that it is (still) a less developed nation than Germany (with Germany’s GDP per capita putting that of China to shame), it is a fair argument that it is more at risk than Germany from a hyper-inflationary perspective. Still, China is not exactly one of the weakest countries out there, we are after all referring to the number two economy worldwide in nominal terms. While the per capita dimension may not be as impressive, we still have more than enough valid reasons to believe that no, China is not what one would call a prime candidate for hyperinflation.

Does this mean hyperinflation can never affect China?

No.

Hyperinflation has affected China in the past and it is not impossible for it to happen again. However, the same principle as with Germany is valid. In order for China to become a realistic hyperinflation candidate, other devastating events would need to occur first, events that cause enough damage for China’s economy to be not severely but downright disastrously weakened, in a manner similar to Germany’s post-World War I situation.

Is this heuristic history-based model accurate?

Simply put, we can never know.

It is arguably the number one rule in trading/investing that past performance does not guarantee future results. We can simply state that up until this point, there are no case studies to speak of involving prosperous economies brought to their knees by hyperinflation. While a reasonable case could be made that the lack of historical precedents makes scenarios involving sudden hyperinflation quite unlikely for prosperous countries, it is important to understand that nothing is impossible in the world of economics.

Some observers might point out that never before has the global financial system been so interconnected and subjected to unorthodox monetary policy, anything from bringing interest rates all the way down to zero and even negative rates in Europe or Japan to proverbially injecting money into the system directly through monetary easing programs. It isn’t outside the world of reason that such unprecedented widely-spread monetary policy could lead to unprecedented/unexpected inflationary scenarios but again, the ChinaFund.com team firmly believes that a sudden onset of hyperinflation is most definitely unlikely if we are referring to developed and reasonably developed nations.

As reassuring as this message might seem, please note that it refers exclusively to hyperinflation, to scenarios such as one dollar going from 4.2 marks to 4.2 trillion marks or such as the population of a country paying for mundane consumer items with wheelbarrows of paper currency. Let us not forget that scenarios which involve problematically high inflation, even if not hyperinflation, can be quite devastating as well and as such, we shouldn’t make the mistake of assuming that the economy of our nation is “safe” from an inflationary perspective just because hyperinflation-related scenarios are unlikely.

There are multiple facets to the inflation dimension, from situations such as the Asian Contagion of 1997 to the stagflation experienced by the United States prior to Paul Volcker taking over as Chairman of the Federal reserve. While not as nightmare-inducing as hyperinflation narratives, make no mistake: these scenarios can lead to ruin, have led to ruin in the past and will most likely continue to do so in the future.

“Prudence” is therefore the operative word and keeping your ear to the ground is a must. Even savvy economists are frequently taken by surprise by inflationary developments, so why assume you or your organization are somehow immune? Needless to say, should you require assistance with respect to hedging from an inflationary scenario standpoint, the ChinaFund.com will happily put its expertise at your disposal.

Is China a saint in all of this?

Of course not.

Are there instances in which China deserves to be portrayed as the proverbial bad guy?

Most definitely, from more than troubling aspects that pertain to human rights to legislative unpredictability. We have, in fact, covered most of them through individual articles here on ChinaFund.com. As such, we would like our visitors to never make the mistake of assuming that just because our business is called ChinaFund.com and just because we specialize in Chinese opportunities, we are somehow trying to “paint” China as the epitome of perfection.

That is hardly the case.

While there are indeed instances in which China is behaving in a manner which needs to be condemned, the currency devaluation debate doesn’t deserves to be included in this equation in our view. Is this because we believe China is not devaluing its currency? Most definitely not. On the contrary, we firmly believe that China has devalued its currency in the past so as to gain an economic (monetary) edge, it is more than willing to devalue its currency in the present and that is unlikely to change as far as the future is concerned.

Why, then, do we believe China shouldn’t be publicly shamed for this practice?

One word: hypocrisy.

If this monetary criticism would have come from entities with an impeccable track record when it comes to “fair” monetary policy, our team would have had absolutely nothing whatsoever to comment. Indeed, trying to devalue your way toward an edge isn’t exactly in the spirit of global cooperation and, on the contrary, has been at the root of many large-scale conflicts throughout our troubled history.

As perhaps a textbook example to this effect, the Great Depression of 1929 was followed by countries abandoning the gold standard en masse so as to weaken their currencies and provide a much-needed boost to exports. Unfortunately, things degenerated from there, with “currency wars” leading to “trade wars” and protectionism with everything it encompasses (primarily barriers to trade) and ultimately, yes, World War II. While World War II most definitely had a wide range of complex causes, the economic dimension can be considered the elephant in the room among common denominators time and time again throughout history.

Fast-forward to the present, with it being time to look at who exactly is criticizing China vocally.

On the one hand, of course, the United States. However, does the US have the moral authority to lecture anyone on this matter in light of the fact that in an effort to combat the economic effects of the Great Recession of 2008-2009, they’ve embarked on an impressive currency devaluation mission through measures which ranged from lowering interest rates all the way down to zero to even “printing” money through their Quantitative Easing programs? At the height of Quantitative Easing, roughly 85 billion dollars were created each month and injected into the financial system, or approximately one trillion dollars yearly. To provide additional context, from 1913 (the year in which the third central bank of the US, the Federal Reserve, appeared) up until the Great Recession (in other words, almost 100 years), the monetary base consisted of roughly 800 billion US dollars. To put it differently, more money was “printed” in one year at the height of QE than had existed after almost 100 years of US central banking.

Who else is quick to criticize China? Of course, the European Union. However, again, does it hold the moral higher ground here in light of the fact that its central bank (the European Central Bank) out-did the United States in a binary manner? On the one hand by bringing interest rates in negative territory rather than “just” down to zero and on the other hand, “printing” even more than the Federal Reserve at the height of the ECB’s easing process?

Is China the proverbial “good guy” or even victim in all of this?

Most definitely not.

The ChinaFund.com team is not trying to state that China is somehow the positive character in this story, that would be just as hypocritical as criticism coming from the Fed or ECB. What we are trying to explain is that there are no “good guys” in this entire equation when it comes to sovereign entities and the only victims are the people who end up being affected by the unsustainable system this is transitioning into.

While human beings tend to be quite inapt when it comes to predicting the future, we believe it is fairly safe to assume that at one point or another, something will put an end to the unsustainable worldwide (most certainly not just Chinese!) monetary status quo. Furthermore, when this happens, it is hard to envision it not being a macroeconomic game-changer.

On the one hand, as history tends to show us, this will likely result in at the very least economic destruction on all fronts but on the other hand, opportunities abound for those who were able to position themselves on the right side of such a generational transfer of wealth. Should you or your organization be interested in the latter, the ChinaFund.com team is here to put its expertise as well as non-hypocritical modus operandi at your disposal.

“Stablecoin” is the key term for those serious about understanding how China could benefit from blockchain technology without embracing existing projects such as bitcoin.

As the very first cryptocurrency out there as well as the very first large-scale blockchain application, bitcoin has created a name for itself which revolves around decentralization: nobody “owns” it and while there are many stakeholders involved (from entities in charge of keeping the ecosystem secured, miners, to the average cryptocurrency investor), there is no single entity that can control bitcoin… again, this state of affairs was perhaps the number one “selling point” of the project right from day one.

What came next?

Altcoins, or bitcoin alternatives, as the name suggests. While many of these altcoins claim they are also decentralized, they tend to have professional teams behind them, marketing departments and a wide range of let’s call them tools which make many question (and rightfully so) just how decentralized they actually are. Even the most popular among them, for example Ethereum, have made network rollback decisions in a less than decentralized manner and, as such, it is fairly safe to state that altcoins tend to be at the very least less decentralized than bitcoin or even centralized altogether.

Where do “stablecoins” fit in?

Right from the beginning, we need to make it clear that a stablecoin is a type of altcoin which is “pegged” to a certain currency. The first such stablecoin was Tether, with the team behind it (the same entity in charge of the Bitfinex trading platform) promising to back up each and every USDT created with one USD held in a bank account controlled by them. Why use USDT instead of simply transacting via the dollar? Simply because many cryptocurrency exchanges are considered questionable at best by the banking system and as such, are unable to secure sound banking relationships because most reputable banking institutions want absolutely nothing to do with cryptocurrency-related projects. Indeed, even Bitfinex itself had and still has its share of difficulties finding reliable banking partners and it is therefore not the least bit difficult to understand the appeal of projects such as Tether.

Unfortunately, stablecoins are not without their share of issues. The number one is, you’ve guessed it, extreme centralization. At the end of the day, you as a holder of USDT or any other stablecoin are relying on the fact that the entity behind the stablecoin in question will keep its promise of pegging that cryptocurrency to the USD, EUR or any other currency.

What if that entity is lying?

What if they “print” their own currency recklessly?

What if the bank account(s) of that entity end up being seized by the authorities?

… the list of potential counterparty issues could go on and on. Unfortunately, history has proven that many of these concerns are quite reasonable. Stablecoin operators such as Tether have promised to keep things transparent by conducting reputable audits but have failed to do so and, on the contrary, more than shady dealings of theirs have repeatedly been exposed.

As such, as interesting as the stablecoin may seem, counterparty trustworthiness has been an issue right from day one.

The result? A potential “niche” emerges in the form of sovereign cryptocurrencies.

In other words, what if the central bank of a country created its own cryptocurrency? Right from the beginning, smaller nations like Venezuela have explored the possibility of launching cryptocurrencies backed by anything from local currencies to commodities such as oil in Venezuela’s case. As time passed, the topic appeared on the radar of more larger sovereigns as well, including… of course, China.

As mentioned in the article mentioned at the very beginning of this post, there are quite a few incentives involved for China.

On the one hand, it would be able to grab a significant slice of the worldwide cryptocurrency pie and on the other hand, it could do so without surrendering any kind of control by running its own stablecoin. On the contrary, blockchain technology in the context of a sovereign stablecoin would be a bit of a capital flow control dream cone true for various countries, as tracking movements is multiple orders of magnitude easier than with existing fiat currencies.

Might China stand to gain quite a bit by launching a stablecoin?

Most definitely.

Will it do it?

Hard to say but in some capacity, it probably will.

Why?

Simply because the pros strongly outweigh the cons. Yes, it is true that this hasn’t really been done before on a large scale and indeed, there are unknowns involved such as whether or not sovereign stablecoins would receive support from the population. At the end of the day, however, it would be a relatively inexpensive project.

Compared to many other projects that sovereign nations spend (waste) money one, running a stablecoin would be a drop in the bucket. In essence, a country such as China has little to lose (because, again, the infrastructure costs pale in comparison with those associated with other projects) and a lot to gain by dipping its toes in these waters: from global recognition as a cutting-edge technology player to the much easier tracking of capital flows, let’s just say this seems like an equation that tends to be asymmetrically in China’s favor.

Can the PBOC be pretty much considered a “status quo” central bank?

Once again, we have to unfortunately point out that things are different in China. Governed by Commercial Bank Law and People’s Bank Law, someone familiar with how things work in China and the high degree of control the Communist Party on China has over pretty much all entities would be tempted to say that compared to many or even most Chinese institutions, the People’s Bank of China has been granted a fairly high degree of autonomy.

By Western standards… not so much.

Established back on the 1st of December 1948, the PBOC is “owned” by the State Council of the People’s Republic of China and has its main headquarters in both Beijing and Shanghai. It is currently governed by Yi Gang (who has held this office since March of 2018), who serves under Guo Shuqing (party branch secretary)… with the nuances which govern the realities surrounding the PBOC being made clear by the “party branch secretary” dimension.

In the West, the idea that a central bank should be independent has been popular for an extended period of time. In theory, this should allow those behind monetary policy choices (central bankers) and those in charge of fiscal policy to cooperate on the one hand but also keep each other in check on the other.

While political pressures are anything but uncommon in the West (for example, the vocal criticism by president Donald Trump of Federal Reserve measures that he considered too tame) and it would be childish at best to assume that central banking doesn’t come with its own political strings attached… let’s just say that for the most part, central banks enjoy a meaningful level of autonomy in the West.

This comes with advantages (the fact that the experts in charge are or should be able to shape monetary policy as they see fit rather than succumb to politics-related temptations such as embarking on overly-populist/dovish journeys) as well as disadvantages. And the disadvantages tend to revolve around the fact that in the absence of stellar coordination with those in charge of fiscal policy, monetary policy can be severely limited in what it is able to accomplish.

The Great Recession and its consequences represents a textbook example to the effect. On the one hand, central banks across all Western nations have embarked on very aggressive monetary policy journeys in an effort (that many called and still call desperate) to revive economic activity. In the United States, more money was “printed” by the Federal Reserve in one year at the height of its Quantitative Easing experiment (roughly one trillion US dollars per year) than had existed in the monetary base from 1913 up until the Great Recession (approximately 800 billion US dollars in just under 100 years) and the European Central Bank embarked on an even more aggressive easing agenda at the height of its easing program.

Was the result remarkably high inflation?

No, simply because most of that money ended up being “hoarded” as reserves by commercial banks and didn’t find its way to the let’s call it real economy. As a bit of an extreme example, it would have been multiple orders of magnitude more inflationary to hand out money to individuals directly (“helicopter money” being the term some economists like to use) because… of course, that money would have been far more likely to end up actually chasing products and services that people consume, resulting in increased economic activity as well as inflation.

Western central banks just don’t have that level of control and as we were able to find out, the very aggressive monetary policy choices which came after the Great Recession has many results (asset price inflation, increased liquidity at certain levels of the monetary equation, etc.) but consumer price inflation was not one of them. In other words, if monetary policy is not equally matched by fiscal policy (for example government spending programs), it becomes much more difficult to control what happens to the money a central bank injects into the proverbial system.

In China, where “control” is the operative word and institutional independence is most definitely not as much of a priority as in the West (to put it mildly), a more politically controlled central bank is obviously involved in an equation where the authorities have much more of a say over the entire process: how much money is injected into the financial system, what happens to that money, when that happens and so on.

At the end of the day, it’s a “pick your poison” scenario.

In the West, central banks in particular and institutions in general are far more independent than in China and while this means they have less control over what happens after their monetary policy prescriptions, there is tremendous value in knowing that (for the most part) decisions are made by expects for reasons that do not pertain to politics.

In China, the opposite tends to represent the status quo framework, with the PBOC (while more independent than other Chinese institutions) representing a piece of the Communist Party of China puzzle. As a result, it is possible to have a larger degree of control over the entire “monetary policy + fiscal policy” equation but the price that has to be paid is one most economists consider too steep: a quasi-surrender to the will of a political entity, in our case the Communist Party of China.

In such instances, indeed, we are dealing with services which are frequently at parity with their Western counterparts and, even more so, some facilities are even medical tourism destinations thanks to the excellent cost/price ratio they are able to put on the table. On the opposite end of the spectrum (when referring to poorer regions), unfortunately, we have a snapshot which tends to be quite gloomy: under-prepared medical staff (frequently not even at a bachelor’s degree level by Western standards), improper infrastructure and the list could go on and on.

One word: fragmentation.

Needless to say, patients are well aware of this reality and simple game theory tells us that they tend to flock toward the (half-)decent centers. On the one hand, this means that the roughly 2,300 high(er)-end hospitals are for the most part running at full capacity/potential (accounting for roughly 20% of yearly outpatient consultations), whereas almost one million lower end hospitals (closer to 950,000, to be more precise) are not exactly patient magnets.

To make matters worse in terms of organization, you will not find the general practitioner-oriented system you might have grown accustomed to in the West over in China. Therefore, it should come as no surprise that this lack of structure brings about a chaotic framework (lack thereof), where those who need medical attention simply rush toward China’s overly-crowded high-end medical institutions in an effort to get the best possible medical treatment.

When it comes to the number of physicians on a per capita basis, the situation doesn’t seem dramatic in China, with roughly 14 doctors for every 10,000 citizens at this point in time. However, as mentioned previously, the less than two general practitioners for every 10,000 Chinese citizens paint the picture of a system that is not exactly a textbook case study of efficiency.

China’s looming demographic difficulties add gasoline to fire.

As it stands, the medical system has difficulties adjusting to the needs of the approximately 65,000,000 elderly. This already-problematic figure is expected to increase all the way to 250,000,000 in a little over ten years (by 2030, to be more precise), a projection which speaks for itself in terms of the challenges China’s medical system is facing.

On the “public vs. private” front, it is worth noting that up until 2014, there were more public hospitals (by registration) than private, but only marginally so for the year 2014 (51% public hospitals, 49% private hospitals). As of 2015, however, the inverse has been true, with the trend being stronger and stronger with respect to private institutions. While there are still challenges such as public hospitals attracting the very best doctors, private institutions can currently put a percentage north of 60% on the table.

As the privatization trend consolidates, it is expected that many inefficiencies of the Chinese medical system will at least be addressed. For example, especially when it comes to higher-end hospitals, patients frequently complain about how hard it is to receive attention from a good physician or how difficult it can be to actually stay at such a facility. This reality tends to be not as much a function of there being too few hospitals as a function of issues such as the average hospital stay being too long in China (over ten days). Comparatively, we are looking at less than 3 days as an average for nearby jurisdictions such as Singapore.

Is progress being made?

Most definitely. From programs aimed at improving the quality of training medical professionals receive (with only than 6 out of 10 having doctors undergraduate degrees in China), to incentives for the private sector to take over whenever possible, quite a bit is being done. However, it will most likely take a considerable amount of time until medical services come anywhere near parity with the West.

Until then and (of course) after that becomes the case, opportunities abound. The most obvious of which is the fact that China represents an enormous medical tourism market in both directions: from affluent and fairly affluent Chinese citizens who are seeking treatment abroad to foreigners who come to China to receive medical treatment. More on that, however, in a future article.

For now, a fairly straightforward conclusion would be this: the Chinese medical system represents yet another case study of fragmentation, with a select few regions being able to offer services at par with Western counterparts (even to the point of representing medical tourism destinations) but with many other regions under-performing. There is ample opportunity for reform and, needless to say, investors who position themselves on the right side of the trades that are forthcoming will most likely do quite well. It goes without saying that should you or your organization be interested in exploring the many opportunities associated with the Chinese medical sector, ChinaFund.com is here to help.

Let’s just say that prior to 1978, the banking system of China was not exactly considered a priority but once Deng Xiaoping’s reform started kicking in and China embarked on a journey toward modernization and the growth it would bring about, a modern(ized) banking system was required. And, indeed, as of the early eighties, four specialized banks were allowed to conduct business (accept deposits, facilitate transactions between various entities and so on). Needless to say, the so-called “Big Four” were state-owned:

1. Bank of China (BOC)
2. Industrial & Commercial Bank of China (ICBC)
3. China Construction Bank (CCB)
4. Agricultural Bank of China (ABC)

As of 1994, three more banks appeared, once again specialized institutions:

1. China Development Bank (CDB)
2. The Export-Import Bank of China
3. The Agricultural Development Bank of China (ADBC)

When it comes to the three previously mentioned entities, while there have been IPOs which resulted in varying degrees of private ownership, the Chinese government still has a majority stake in them. However, a low double-digit number of joint stock commercial banks were allowed to enter the market and a low three-figure number of city commercial banks also appeared. Furthermore, to encourage access to capital and the development of its banking sector, the Chinese authorities gradually allowed foreign banks to establish branches in China as well as hold a minority stake in various state-owned banks.

Last year (based on preliminary 2018 data), the Chinese banking system had over $14 trillion in assets and while there is currently quite a bit more diversification going on, five state-owned banks still account for over a third of the total asset volume.

Aside from (of course) the People’s Bank of China that inevitably still plays an extremely important role in the Chinese banking system, the main regulatory entity is the CBIRC (China Banking Insurance Regulatory Commission), which replaced the CBRC (China Banking Regulatory Commission) in 2018. It is also worth noting that just like in other jurisdictions such as the United States (through the FDIC) or European Union (with each EU member state having its own system in place), deposit insurance frameworks have been introduced in China as of 2015 so as to tackle banking system vulnerabilities such as bank run scenario.

As far as the future is concerned, things seem to be on the right track when it comes to the transition process, away from PBOC domination and toward a banking system that more closely resembles its Western counterparts. While this transition has facilitated much easier access to capital and provided the financial support China’s impressive growth plans needed, there are risks involved.

As mentioned in another article, while Western banks help the Chinese banking system through transfers of technology, business practices and so on… the “business practices” dimension sometimes get tricky, as reckless investing-related behaviors have also emerged and given birth to a systemically dangerous shadow banking system in China. However, in light of the fact that 2018 represented the first year in which a 6.5% YOY decline of the shadow banking system was observed, in no small part due to the attention given to this problem by the Chinese authorities, there are reasons to be moderately hopeful that China’s banking system can be kept on its modernization path without the negative aspects associated with this modernization proving to be deal-breakers.

Before going into that, let’s (very) briefly explain what shadow banking actually is. To keep things simple, “traditional” banking revolves around entities (from regular people to companies and even local authorities) establishing a long-term relationship with a bank from which they borrow a more or less significant amount of money. A fairly straightforward relationship in which the bank provides the capital a certain entity needs and then that entity pays the bank back, plus interest, over a period of several months or years.

However, when there is a lot of demand for loans, perhaps more than what banks can handle, the financial sector tends to get creative and this is how shadow banking came about. Unlike regular banking, the equation is more complex. For example, the bank establishes a relationship with an entity that needs money through a loan arrangement but then packages many of these loans in the form of financial products and sells them to investors. Or packages these loans, sells them to various financial industry companies, which then sell them to retail investors… it can even get much more complicated than that.

So complicated, in fact, that risk assessment becomes a challenge.

The 2007-2008 Global Financial Crisis was actually brought about by shadow banking to a (very) significant degree, due to products called Mortgage Backed Securities being recklessly created, sold and even insured. Once enough people stopped paying back their loans, the entire house of cards collapsed: investors lost money, financial industry companies became insolvent and even insurance giants such as AIG were unable to meet their obligations.

Why?

Again, simply because these products can be so complex that risk assessment mistakes end up inevitably being made.

What were the implications with respect to China?

As expected, the Chinese authorities wanted the economy to recover after the crash and encouraged lending so as to facilitate just that. Ironically, the shadow banking industry in China started taking off in the aftermath of the Global Financial Crisis. Simply put, there was more demand for loans than the Chinese banking sector could keep up with, so the previously-mentioned “creative” banking solutions appeared, with everyone seeming content with the arrangement:

1. Various entities in China had better access to financing
2. Banks could expand their activities and, as a bonus, shadow banking-related ones could be kept off their books
3. The Chinese GDP was able to keep growing

… however, all of this came at a cost: increased systemic risk.

In other words, what would happen if things go wrong? Of course, in light of the fact that the financial system was bailed out in the West, most analysts expect the exact same to happen in China, especially in light of the fact that there is a clear precedent, with two state-owned banks being bailed out to the tune of $45 billion back in 2004. Such precedents, corroborated with the increased willingness of the Chinese authorities compared to their Western counterparts to be in control of its what is happening in various sectors of the economy, make it likely that those in power will be willing to bail out the financial sector.

But will they be able to?

It’s not 2004 anymore and even with the 6.5% YOY decrease in 2018 compared to 2017, shadow banking volume represents roughly 68% of China’s GDP and 23.5% of its banking industry. Let’s just say $9.1 trillion is a more challenging bill to foot than $45 billion. Also, as mentioned previously on ChinaFund.com, China is not yet considered a “safe haven” destination and as such, should turbulence occur, access to capital is more likely to be problematic than in let’s say the United States.

For this reason, it is vital that the Chinese authorities continue aggressively working on the shadow banking problem, even if it inevitably leads to collateral damage such as financing being harder to come about and economic growth being affected. Steps seem to be taken in the right direction and rational investors are more than willing to accept today’s more prudent 6%-6.5% GDP growth rates rather than continuously aim for the 10%+ results of the pre-2010 period at the expense of stability and sustainability.

As a conclusion, 2018’s YOY decline in shadow banking volume is most definitely a positive development but a multi-year trend continuation would be required to bring things on the right track when it comes to the systemic risk posed by shadow banking activities.

After World War 2, the wealth dynamic was asymmetrically in the favor of the United States, with them owning roughly two thirds of the world’s gold. As such, it was decided to switch from currencies fully backed by precious metals to a system where they were indirectly backed by gold. In other words, all currencies were tied to the United States Dollar and the Dollar was backed by gold.

As of 1971, however, Richard Nixon took the United States off the gold standard, after central banks kept demanding gold in exchange for their paper money due to concerns about the United States increasing its monetary base so as to fund projects such as the Vietnam War and Lyndon Johnson’s Great Society.

Do you see a pattern?

It’s not very difficult to figure out that changes of our monetary system tend to be cyclical in nature. Perhaps it’s due to re-balancing brought about by changes in wealth distribution, maybe it’s a result of confidence loss. Whatever the reason(s) may be, we just know this tends to happen every once in a while and an important question arises: can the current status of the US Dollar as the foundation of global trade persist indefinitely?

While it’s impossible to be 100% percent certain, we have valid reasons to believe something will eventually change and a lot of thinkers are wondering whether or not the next monetary system will be centered around China.

While it is true that China has been experiencing tremendous growth and is on a clear upward path, we need to understand that a financial system dominated by China is an unrealistic goal, at least for the next monetary system cycle. While China’s growth has been nothing short of impressive, it’s still not nearly as dominant as the United States was after the Second World War.

Perhaps if China were to reach GDP Per Capita parity with the US and thereby have a five or six times higher nominal GDP as a result of the major population difference between the two, the balance might lean in China’s favor. At this point though, that is not the case, so the question remains: if the next financial system will not be China-centered but the Dollar’s status as the global reserve currency will disappear… then what?

A potential answer lies somewhere in the middle.

While the next financial system cannot, realistically-speaking, become China-dominated, this doesn’t mean China cannot play an important role. The same way, players such as Japan and the European Union (an European Union with a combined GDP greater than that of China and also greater than that of the United States, let us not forget that) might want to or need to play a role as well.

At this point, the best thing we have is something close to the IMF’s SDR system. Or, to put things differently, perhaps our best choice would be embracing a new monetary system based on a basket of currencies rather than one dependent on just the United States or China. As always, however, one can never know for sure.

The two quasi-certainties we have are:

1. A US-centric monetary system will most likely not be able to persist indefinitely
2. China is not ready to take over at this point, nor is it a given that just one country has to take over

As such, while not a prediction in and of itself, let’s just say the highest-probability outcome in terms of our new financial system is represented by the “basket of currencies” dimension. Therefore, an adequate answer to the question which constitutes the title of this article would be this: yes, China could be at the center of the next monetary system… but not alone!