China: Long Held US Fears Becoming Reality?

Last year we wrote

“… a decade after the explosion of the speculative bubble there has been no solution to the global economic stagnation which it provoked. With no economic solution in the offing and with the different problems of the various great powers mounting the way has opened up for new and more desperate political forces to make their presence felt. We can see some of these in the new climate of nationalism across the globe and in the growing number of openly enunciated threats by the great powers on the planet towards each other. Add to all that the fact that we have arrived at a point in history where the greatest power of all on the planet for the last century is facing new challenges to its economic and military dominance not seen since the collapse of the USSR.” (“Russia, China and the USA’s New World Disorder” in Revolutionary Perspectives 09)

We followed it up with a shorter piece on our website in November entitled “China Openly Declares Its Imperialist Ambitions”.[1] Nothing that has happened since undermines the analysis in either article. Today, there is no shortage of flashpoints around the world which could provide the opening scene for the next great imperialist confrontation. Whilst North Korea and the USA play nuclear Russian roulette with the fate of the planet, the increasing tensions in the Middle East and North Africa now engulf almost everywhere from Libya to Burma/Myanmar. At the same time the unfinished business of the war in Eastern Ukraine stimulates military manoeuvres along the entire Russian border by both Washington (in NATO guise) and Moscow.

Of course, this is not an exhaustive list of all the barbarous conflicts that imperialist rivalries are inflicting on so much of humanity, and there will be many more to come, but what we would like to focus on here is the new sharpening of imperialist rhetoric in the rivalry between the US and China. What makes this rivalry so dangerous in the longer term is the global mismatch between the world’s latest economic powerhouse, China, and the greatest military power humanity has ever seen in the USA. Although direct conflict is not likely in the immediate term, this rivalry has been open for some time (as we showed in the articles mentioned above). It became even more explicit at the end of 2017. In October Xi Ping cemented his power at the top of the Chinese Communist Party declaring that the “China Dream” was to become the world’s top dog in 2049 (exactly a century after Mao came to power in Beijing).

Trump was not slow to respond and the publication of the new US Strategic Plan in December 2017 gave him the chance to openly declare that “China and Russia want to shape a world antithetical to US values and interests”. Trump refers to both as “rival powers” but only once in Russia’s case whereas China gets several mentions. And harping back to his “China is raping our economy” theme he added “The United States will no longer turn a blind eye to violations, cheating, or economic aggression.” Both sides, in their different ways, are preparing their next moves.

Rebuilding the Silk Road

China’s strength lies in its enormous trade surplus with the world. Its weakness is that it lacks oil and gas resources. Both require secure trade routes. However, China is surrounded by over 400 US military installations including the deployment of the latest THAAD missiles system in South Korea. In a world which is dominated by US control of the Indian Ocean and the Pacific, China needs to find other ways to ensure its trade security.

This is why the Chinese Communist Party is pushing forward plans to finance and build infrastructure which will span the continents of Europe and Asia from the Atlantic to the Pacific. The ultimate aim is a Eurasian trading bloc which if allowed to develop unchallenged by the US, could one day effectively see it shut out of many of its traditional markets and isolated as no more than a regional power.

On the 14 May 2017 China welcomed 29 Heads of State or their representatives to a two-day summit to celebrate its $900 billion initiative, “One Belt One Road”. Even Japan and South Korea, who contest China’s bid for hegemony in the region, sent representatives. Most other countries engaged in territorial disputes with China over the South China Sea issue, including Vietnam, Indonesia, and the Philippines also sent official delegations. India and Pakistan also took part. The summit appears to have been a successful exercise in Chinese soft power. In an about turn, the Japanese Prime Minister signalled his intention at G20 2017 to participate in the Belt and Road Initiative (BRI) and the Philippines’ trade minister has chosen to set aside the country’s maritime border dispute with Beijing in the South China Sea and focus on building economic links.

Based in Beijing, the Asian Infrastructure Investment Bank (AIIB) was created in 2014 by 57 founder member countries[2] including Germany, France, Italy and Great Britain, with 24 more prospective members expected to join. The bank became operational at the end of 2015. At the time, the US suffered a humiliating diplomatic setback when it tried and failed to dissuade its friends and allies from joining. US policymakers assumed that its Asia-Pacific allies would willingly sacrifice the economic opportunities offered by China’s initiative in order to deny Beijing a geopolitical win at Washington’s expense. They underestimated China’s economic pulling power, with only Japan succumbing to US pressure. The AIIB, created for project infrastructure investment, and the Silk Road Fund, intended for investment in related businesses will work together towards developing the initiative. Hong Kong will be a key financial gateway for BRI, helping to find financial partners for BRI projects. The scale of BRI both in terms of ambition and funding is enormous and dwarfs the post war US Marshall Plan. The China Times estimates that the total value of the Silk Road Economic Belt, when it is complete, will be an astronomical $21.1 trillion. This is a long term development plan which contrasts starkly with the policy short-termism that predominates in the US and Europe.

The Belt and Road initiative (BRI) has two main prongs: one is called the ‘Silk Road Economic Belt’ (the belt) and the other the ‘21st Century Maritime Silk Road’ (the road). In fact, the ‘road’ is not actually a road but rather a sea route linking China’s southern coast to East Africa and the Mediterranean. The ‘belt’ is a series of overland corridors connecting China with Europe, via Central Asia and the Middle East. Work has already begun to put in place an infrastructure for the continent’s economic integration by funding infrastructure projects across Asia and Europe. Beijing plans to lay down an elaborate and enormously expensive network of high-speed, high-volume railroads, motor-ways and airports; as well as oil and natural gas pipelines across the vast breadth of Eurasia. For the first time in history, the rapid transcontinental movement of critical cargo such as oil, minerals, and manufactured goods will be possible on a massive scale, thereby potentially unifying that vast landmass into a single economic zone stretching 6,500 miles from Shanghai to Lisbon. In this way, the leadership in Beijing hopes to shift the locus of geopolitical power away from the maritime periphery and deep into the Eurasian heartland.

Significant progress has already been made on the China-Pakistan economic corridor (CPEC), a huge project of more than $62 billion[3], which demonstrates the growing economic and political relationship between Pakistan and China. The CPEC is about 3000 kilometres long consisting of a vast web of pipelines, motor-ways, power plants, wind farms, factories, airports and railways, creating an estimated 1 million jobs .

CPEC will connect China’s Xinjiang province to the rest of the world through Pakistan’s Gwadar port. The project has been divided into different phases. The first phase of the project is the completion of Gwadar International Airport and the development of Gwadar Port. Chinese companies are scheduled to complete the first phase by the end of 2017. Other small projects in the China Pakistan Economic Corridor include the expansion of Karakoram Highway. A fibre-optic line will also be placed in between the two countries to ensure better communication. Pakistan, one of the major countries in South East Asia and a US ally, is already raising the possibility of distancing itself from the US orbit as it sees the possible economic benefits from closer co-operation with China.

The economic corridor is a way for Pakistan to eliminate its transportation problems and both countries to tackle their energy crisis. For China, CPEC represents one of the biggest investments it has ever made in a foreign country but as one of the major oil importers in the world CPEC will give it a safe and sustainable pipeline route for its oil imports_._

In early 2017 Chinese wagon trains loaded with Chinese manufactures arrived in Hamburg, Madrid and London from Yiwu in Zhejiang province. The 7,500 mile journey took 18 days and passed through 7 countries. The trains, following the old silk road through central Asia, then across Russia, Belarus and Poland into western Europe are unlikely, initially at least, to have a decisive effect on present patterns of trade because of the necessity to switch freight containers at various points due to different track gauges. It will take time to address these kinds of infrastructure problems especially given the political obstacles emanating from the EU.

The real importance of this is the impact it is likely to have on European businesses and governments, since a network of rail links reduces the distance between Asia and Europe and facilitates trade and commerce. It indicates how the dynamic of capitalist globalisation is now much more complex than simply the transfer of manufacturing from the old industrial heartlands to cheap labour, low cost China. Now China itself is looking for secure supply lines, raw materials and new markets and in so doing posing questions for both Russia and the EU (not to mention the UK) about the wider repercussions for their role in reshaping the international imperialist line-up. Similarly for Asia as a whole, if BRI succeeds the land mass would be more integrated economically. A Chinese railway through Myanmar for instance would provide a route to the sea that bypasses the pinch point of the Strait of Malacca. At the same time, though, these apparently straightforward technical projects also present a threat to established powers, not least Japan and South Korea. At the moment Japan seems to have decided to go along with the project, in so far as ‘opening up’ could also benefit its balance of trade.

Vast infrastructure projects in central Asia and Africa are designed to mop up China’s excess industrial capacity in such industries as steel, cement and aluminium; and to secure sources of raw materials. Beijing wants new investment channels to expand its presence in Europe. The Chinese government wants to draw the rich European nations closer to China. Its vision is to do this by recreating the sea and land routes of an earlier era of globalisation. The Chinese government sees The One Belt One Road idea as being the basis by which the great land mass of Eurasia becomes over time the vital fulcrum of its global power. Their biggest problem is that there will be much political resistance, especially from the European Union states who also have to agree to any investment as stakeholders in the AIIB. This is why the Chinese government still maintains here the mask of taoguang yhanghui (“We should conceal our capabilities and avoid the limelight”) advocated by Deng Tsaio Peng even though it has adopted a more aggressive and bullying policy with its island building in the South China Sea.

The projects that make up the Belt and Road Initiative are thus medium to long-term projects, which will be completed over the next two or three decades. A more immediate benefit to China comes in the form of soft power exactly at the time that the US is retreating into “an America First” position. US sinologist David Shambaugh of George Washington University says that China spends approximately $10 billion a year on foreign-language media abroad, Confucius Institutes, educational exchanges, foreign aid, cultural festivals abroad, and generally trying to portray China as a defender of the international order, trade, and globalisation.

However, One Belt One Road, represents a major extension to this effort and Trump’s dropping of the US-backed Trans-Pacific Partnership (TPP) free-trade agreement, which includes Vietnam but excludes China, is a blunder that leaves the way open for China to extend its influence in the region. President Xi has already taken advantage of this by calling for a pan-regional Free Trade Area of the Asia-Pacific (FTAAP), which will essentially be a consolidation of existing free-trade deals between China and other regional economies. This, together with the deals that will be made as a result of the BRI, are likely to increase China’s influence in the region.

The Challenge to the USA

Long the dominant power in the world, the US consciously pursues policies which intend to keep the world that way. However, over the last few decades entire libraries have been produced with warnings of the US’ imminent demise.[4] US policymakers are acutely aware that other great powers have risen and fallen before them. Not least amongst these is the British experience.

At the turn of the 20th Century, Great Britain’s national debt stood at around 30% of GDP and the pound was the world’s undisputed reserve currency. The first imperialist world war caused Britain’s national debt to increase from £650 million to £7.4 billion which became £21 billion by 1945.[5] The bulk of these debts were owed to its major creditor, the US, which emerged at the war’s end as the world’s strongest economy and military power.

No surprise then that at the Bretton Woods Conference it was decided that the world’s reserve currency would be the dollar which would be fixed at $35 an ounce of gold.

A gold-backed dollar worked very well for the US during the long post war boom years. But when the laws of capital accumulation inexorably reasserted themselves in the form of the decline of the rate of profit, the cycle of accumulation entered its phase of decline. The clearest sign of this was that the US was forced to take the dollar off the gold standard in 1971 leaving only US Treasury debt as the basis for global reserves. The balance of payments deficit stemming from the US’ declining competitiveness and lower profit rates – by the 1970’s the US was a net importer of goods – pumped dollars abroad and was exacerbated by foreign military spending. Some of these never returned to the US but became petrodollars or Eurodollars whilst others ended up in the hands of central banks that recycled them to the US by buying Treasury securities, which in turn financed the US domestic budget deficit. This gives the US economy a unique financial free ride, enabling it to finance its deficits seemingly ad-infinitum without creating an inflationary crisis that would have been the case for any other state. The balance of payments deficit has thus financed the US domestic budget deficit for decades. The post-gold international finance system, boosted by such things as the petrodollar, obliges foreign countries (the Chinese government alone holds around $3.5 trillion) to finance US military spending whether they like it or not. And the US uses its “free” military and naval apparatus to police oil routes and ensure that oil producing countries continue to trade in dollars.

One annoying fact for the US in the post-1945 world was that the Soviet Union had fought its way to the Elbe so that Europe became divided into two blocs dominated by the US and the Soviet Union. The US allowed the Soviet Bloc to form because US strategic thinkers thought that the Eastern European Soviet Bloc countries would soon be brought into the more dynamic Western bloc economy because of their inherent economic weakness. However, the Stalin regime enforced non-convertible currencies on them effectively locking out the dollar. Maoist China came on the scene in 1949, and together with the Soviet Bloc, half of the world’s population was frozen out of the “free market”, engendering the tense stand off between the blocs known as the Cold War. This period came to an end with the collapse of the Soviet Union in 1989.

The collapse that US strategists had been predicting in the Eastern European Bloc countries actually occurred in the Soviet Union first. The repeated failure of reform amid the strain of competing with the US in a continual arms race led the Soviet economy to breaking point. The resulting triumphalism of the “Free World” at the “collapse of communism” made the US believe that, as the only super power, it could now use military might around the globe as it pleased. The first Iraq war was followed by Afghanistan and the second Iraq war. Although Saddam Hussein’s fate and the destruction of the Iraqi economy effectively preserved the remaining oil trade for the US dollar, the huge cost of these military adventures, in terms of both financial and political capital, has been disastrous for the US; and demonstrated the limitations of purely military interventions. The hallmark of Obama’s time in office was the exercise of “smart power” and a multilateral approach which tried to reinforce US allies.[6] It also led to a reining back on costly military interventions which only exacerbated the national debt in order to improve the US’s international image. Currently, the US is in a difficult position because the use of hard power (under Bush) then soft power (under Obama) has created a sense of incoherence. This has been exacerbated by divisions over foreign policy between Trump’s cabinet, other state departments, the CIA and the US military. So much so, that it’s difficult to see what direction US foreign policy is taking.

It was not always thus. In the 1990s Zbigniew Brzezinski, the US’s top strategist from 1977 to 1981 under President Jimmy Carter, and an adviser to the Clinton administration understood that the end of the Cold War hadn’t made US geopolitical strategy obsolete. He argued that,

Eurasia is the world’s axial super-continent. A power that dominated Eurasia would exercise decisive influence over two of the world’s three most economically productive regions, Western Europe and East Asia. A glance at the map also suggests that a country dominant in Eurasia would almost automatically control the Middle East and Africa. With Eurasia now serving as the decisive geopolitical chessboard, it no longer suffices to fashion one policy for Europe and another for Asia. What happens with the distribution of power on the Eurasian landmass will be of decisive importance to America’s global primacy and historical legacy… Eurasia’s potential power overshadows even America’s.”

Brzezinski died in 2016 but his warnings have been ignored and effectively undermined by the Trump administration.

US Foreign Policy Manoeuvres

During the US presidential election campaign Trump was very critical of US military adventures around the world, particularly in Afghanistan, which he described as “a complete waste” and the Middle East where he criticised the $6 trillion that the supposedly non-interventionist Obama had wasted on conflicts. He felt that the US and Russia should instead cooperate in defeating ISIS. He declared just after the election: “The destructive cycle of intervention and chaos must finally come to an end,” and he promised that the US would be pulling back from conflicts around the world that are not in America’s vital national interest.

However, Trump in office has seen fit to undertake no less than five acts of foreign aggression in a few short months. The first was a joint operation with Emirati commandos in Yemen, which backfired, leading to the death of a Navy SEAL. The second was an attack on a Syrian airfield, in response to an alleged poison gas attack. The third is the escalation of military manoeuvres in the seas around North Korea. The fourth is the bombing of a cave network in Eastern Afghanistan using the “mother of all bombs”. And the fifth is the deployment of more troops to Northern Iraq and Eastern Syria ostensibly to step up the fight against ISIS.

The rhetoric is also being ramped up against the US’s long-term bogeyman, Iran. In addition Trump has done a full U-turn on withdrawing troops from Afghanistan. He is also seeking Congressional approval for a 10% increase in defence spending totalling $54 billion, a massive increase which, to put it in perspective, is almost equivalent to Russia’s total defence budget of $66 billion.[7]

Far from being apparently random acts announced using twitter, or over dinner with President Xi, they are consistent with foreign policy objectives of the US since the end of the second imperialist world war. The US is concerned about the emergence of a new potential rival in the form of China, which has ambitions to become the dominant player in Asia and beyond. Military actions send it a message about who is still militarily the dominant force on the planet.

The US is also pushing Russia into becoming a closer ally of a China that is looking to extend its influence into Europe as much as it is in Asia. Facing US economic sanctions and military encirclement, Putin is looking increasingly towards the East. Putin said in February 2012, “Russia is an inalienable and organic part of Greater Europe and European civilization. Our citizens think of themselves as Europeans…That’s why Russia proposes moving towards the creation of a common economic space from the Atlantic to the Pacific Ocean, a community referred to by Russian experts as ‘the Union of Europe’ which will strengthen Russia’s potential in its economic pivot toward the ‘new Asia.”

Russia’s relative weakness has led Putin to commit to greater cooperation with China and its Eurasian common economic area. Putin places much store in the Shanghai Cooperation Council where China and Russia combine to keep the US out of Central Asia. However, China has increasingly drawn Russia’s old Central Asian satellites, towards it as a result of its BRI expansion. China imports oil from Kazakhstan; natural gas from Turkmenistan, Kazakhstan, and Uzbekistan; uranium from Kazakhstan; operates gold mines in Kyrgyzstan and Tajikistan; and is searching for rare earths in Tajikistan. The infrastructure projects Beijing has financed in Central Asia, the roads, railways, and pipelines, lead back to China. Consequently, tensions with Russia have increased because Russia’s political and economic influence has been reduced. There are also local tensions as a result of the influx of Chinese workers. But for now Putin is content to ignore this, seeing Russia’s economic and political future as a junior partner in One Belt One Road.

The US cannot afford to allow these ambitions to remain unchallenged, which is why US media has alleged that Moscow intervened in the US presidential elections and that Russia is a serial aggressor that poses a growing threat to European and US national security. This has been going on since Trump’s election. It has been accompanied by a NATO build up in Europe, proxy military interventions in the Middle East and by the recent ramping up of economic sanctions, which are incidentally, deeply unpopular with the US’ European allies, especially Germany, which gets one third of its energy supplies from Russia.

It might seem at first sight that NATO’s recent land and sea exercises in Eastern and Southern Europe as well as the Black Sea frontiers of Eurasia are provocations designed simply to anger and intimidate Russia. It might also seem that the US’ presence in Iraq and Syria is designed to anger and intimidate Iran. But they are at the same time provocations designed to send China a strong message. And this message is being sent at various points along the “New Silk Road”.

In Poland US soldiers have been deployed as part of troop rotations to Europe that the Pentagon has said are intended to bolster ties with NATO allies and send a clear message to Russia. The Polish government allowed more US troops to enter Poland to take part in the recent NATO exercises.

In Romania the US has also built a ground-based $3.9 billion Patriot missile defence system at a site that is just 900 miles from Moscow. The US missile system which was “certified for operation” in May 2016, cancels-out Russia’s nuclear deterrents and undermines the last vestige of Russia as a world super-power.

One Belt One Road had been announced by China in the Autumn of 2013 and Ukraine’s President at the time Viktor Yanukovych visited China in December of that year where he met with Chinese President Xi Jinping. During the meetings, China agreed to invest $8 billion into the Ukrainian economy. A few months later, the US organised coup took place in February 2014. The US thus annexed a vital land-bridge between the EU and Asia, enabling it to try to control critical rail and pipeline corridors that are drawing the two continents of Asia and Europe closer together.

The New Silk Road’s maritime route into Europe goes through Greece where the Chinese state have purchased the port of Piraeus. From there it will pass by Albania and Montenegro via the Ionian and Adriatic Seas. For this reason, the US has been fomenting Albanian extremism in Macedonia, which has a large Albanian minority, in an attempt to weaken the position of President Gjorge Ivanov. The effect is to threaten the existence of the small Balkan state. Furthermore, the US has been deeply supportive of the “Greater Albania project”[8], which would see Albania annex not only parts of Macedonia but also parts of Serbia, Montenegro and Greece. Montenegro’s recent, deeply controversial membership of NATO[9] will only exacerbate the problem, since the country remains divided politically, and has close ties to Serbia which remains a Russian ally. One of the US’s main aims with “Greater Albania” is to destabilise Serbia. The New Silk Road’s path into southern Europe thus faces more than a few problems.

Another hotspot of US making along China’s New Silk Road is in North-Eastern Syria. This is also an area in which Syrian Kurds are growing increasingly vocal about independence. Should the US support Kurdish nationalists in northern Iraq and North Eastern Syria, this could create two decidedly pro-US camps along the New Silk Road. If Syrian and/or Iraqi Kurdish nationalists manage to establish a union with the Kurdish nationalist PKK in Turkey, the New Silk Road’s pathway into Turkey could also be threatened; just as the Syrian Ambassador to China has confirmed that China will be given priority in the rebuilding of post-conflict Syria. In July 2017, the China-Arab Exchange Association in cooperation with the Syrian Embassy in Beijing held the Syria Day Expo where Representatives from over 1,000 Chinese businesses specialising in redevelopment, infrastructure and investment met with Syrian officials.

Far from just being a large repair initiative for Syria’s damaged infrastructure, Chinese developmental and investment cooperation could lead to long-term mutual benefits for both China and Syria. Due to Syria’s position on the Eastern Mediterranean and its good relationship with both its Iraqi neighbour and Iraq’s eastern neighbour Iran, Syria is well placed to be an important stop on China’s New Silk Road. The idea that in a few years time, Syrian ports could be an important export route for Chinese goods into other parts of the Mediterranean is one that may come to fruition. The clear loser in such a deal would be the US. In order to counter this therefore, the US continues to increase its presence in Syria.

Ships on the maritime New Silk Road are set to pass through the Bab-el-Mandeb Strait, which links the Gulf of Aden to the Red Sea. Currently, the Strait is under naval blockade from the US’s ally Saudi Arabia. The results of this have led to a humanitarian disaster for the Yemen, which is the subject of the Saudi blockade. The presence of US friendly Saudi ships could also become a threat to China’s shipping routes to the Red Sea.

These flash points on the geopolitical map all look, on the face of it, like aggression and antagonism towards Russia, Syria and Iran. While this is undoubtedly true, they are also in fact, key strategic interventions which either involve direct military aggression or military/naval build ups, broadly tracing the path of the Chinese land and maritime silk roads. The Chinese do, of course, have a degree of flexibility about the path of the land and maritime silk roads and will alter the path as necessary. However, the US is trying to put as many barriers in its way as it can by situating itself or its proxies in areas designed to make China’s commercial/trade expansion as difficult as possible. It seems certain that as China begins to extend the logistical element of its global trade dominance, so too will the US seek to disrupt it wherever it can.

Meanwhile China is using a strategy of building up relationships with its Eurasian neighbours and fostering Eurasia wide infrastructure and trade development to overcome the US; whereas the US relies almost exclusively on military power, deception, covert activity and financialisation.

The Challenge to Dollar Hegemony

As we saw above the US has been able to pass much of the cost of its own economic decline and inflationary spending onto foreign users of the dollar for its own benefit [11]. However, by publicly complaining about the way in which the US takes advantage of the dollar as world reserve currency, it is clear that the Chinese and their partners have been actively seeking to alter the balance of power and challenge the dollar’s supremacy.

Arguably, the world is already bi-polar in terms of its most powerful economies. China is now the world’s biggest exporter of manufactured goods. It is the biggest car producer, exceeding the US and Japan combined in 2009. In the same year it also surpassed the US as the biggest car market in the world with car sales increasing by 50% to 13.64 million, while US sales fell by around a fifth to 10.43 million. China is second only to the US in oil consumption and is the biggest energy importer (gas and oil) in the world. China has already reached the point where it can no longer continue to grow without directly challenging the dollar’s supremacy. And this is exactly what it has begun to do.

Dollar hegemony stands in the way of China becoming a true equal of the United States for a number of reasons. Dollar hegemony allows the US to spend well in excess of half a trillion dollars every year on military spending. The US Defence budget dwarfs that of China and Russia combined.[12] Effectively, with its holding of around 3.5 trillion in dollars and US treasuries, China pays for its own encirclement by the US army and navy. The dollar is the currency in which trade in oil is denominated and if China buys oil from the Middle East it must pay in dollars. China’s huge dollar holdings (largely in the form of US treasuries) represent a high risk since China is vulnerable to dollar devaluation or inflation; and following the 2008 global financial crisis, China also realised that, given the weakness of the international monetary system, dollar dependency would be a major risk moving forward. A further difficulty for China is that the US has a tight grip on the world financial system. The majority of world trade is still in US dollars and the US also controls the international trading system, Society for Worldwide Interbank Financial Telecommunication (SWIFT) through which international trade is largely conducted.

For these reasons China has been acting to undermine the dollar as world reserve currency. A start was made in 2001 when the Shanghai Cooperation Organisation (SCO) was founded by the leaders of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Aside from its political objectives, this represented an early move to challenge the dollar, with a Framework Agreement to enhance economic cooperation, and a long-term objective to establish a free trade area in the SCO agreed in 2003, where the dollar would be excluded. India and Pakistan joined as full members in June 2017.

In 2009 China and Russia called on the IMF to replace the dollar as the world currency with a new currency based on IMF special drawing rights. As the west and especially the US control the IMF and World Bank it predictably failed.[13] China has since sought to undermine the World Bank and the IMF. One way was via the creation of the New Development Bank in July 2014, with its head office in Shanghai. The Bank is run by the BRICS countries. Each country has a 20 percent shareholding and voting rights. The bank says all members of the United Nations could join the bank. However, the BRICS nations can never be less than 55 percent of the voting power. The bank is intended to help develop growing economic relations among nations who wish to promote trade and investment and industrial cooperation and, at the same time, avoid US dominated financial institutions like the IMF. The NDB currently has 23 projects costing $6 billion, including $1.7 billion in China and $1.8 billion in India. In 2016 the bank provided over $1.5 billion in financial assistance.

China itself has also established its own institutions like the China Development Bank and the China Export-Import Bank. These are the tools through which it funds overseas developments. In 2010 they overtook the World Bank in supplying such loans for the first time.[14]

China is seeking wider global use of the renminbi (RMB), in line with its status as the world’s second-largest economy and to challenge the US dollar. Renminbi internationalisation accelerated in 2009 when China established the “dim sum bond”[15] market and expanded the Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. In November 2010, Russia began using the renminbi in its bilateral trade with China. This was soon followed by Japan, Australia, Singapore, Great Britain and Canada. As a result of the rapid internationalisation of the renminbi, it became the eighth-most-traded currency in the world in 2013.

As a founding member of BRICS, as well as a major energy exporter, Russia has been leading the way in acting against the dollar. Other nations are now following Russia’s example: Iran and India announced in 2016 that they intend to settle all outstanding crude oil payments in rupees, as part of a joint strategy to dump the petrodollar and trade instead in national currencies. This is a bold move by Iran since, as the CWO has pointed out before[16], Saddam Hussein was overthrown because he instituted a policy of selling oil for euros, not dollars. As a result, there is little doubt that the threat to dollar hegemony was discouraged. But things are beginning to change and China quietly announced in 2016, that it will launch direct trading of its currency, the renminbi, with the riyal of Saudi Arabia and also with the dirham of the United Arab Emirates. This may pave the way for future oil sales between China and Saudi Arabia to be settled in renminbi, which would represent a major blow to the petrodollar. Another incentive for Saudi Arabia to trade its oil in renminbi is that Russia is now the top crude oil exporter to China. A few years ago, Saudi Arabia enjoyed a 20% share of Chinese crude imports, while Russia was lagging far behind with 7%. Now the Saudis find themselves neck and neck with Moscow for the lead in Chinese market share, with both supplying 13-16% of China’s oil needs. Russia’s share continues to grow as Saudi Arabia’s falls because Russia is prepared to accept renminbi for its oil.

There are 23 countries outside of China, which are creating new currency swap lines outside of the dollar including Russia, India, but also significantly, Germany, France, and the United Kingdom. This means that the Eurozone itself is preparing to go outside of the dollar, and make use of a new central banking system.

China’s currency reached another major milestone on its march towards internationalisation by breaking into the top five most-used global payment currencies in 2015.

According to data from SWIFT, the international currency clearing system, 2.2 per cent of the world’s payments were conducted using the Chinese currency in December 2014, putting it above both the Canadian and Australian dollars for the first time. The renminbi now sits just behind the Japanese yen, which was used for 2.7 per cent of transactions, the British pound, the euro and the top-ranked US dollar. Use of the renminbi is still well behind that of the euro and the dollar, which together account for three-quarters of all transactions, but growth has been rapid and is set to grow still further. During 2014, payments made in the Chinese currency more than doubled the previous year’s, and have risen 361 per cent since the end of 2012.

There is a momentum towards moving away from the dollar as world currency. What still stands as a major barrier in its way is the understanding that Saudi Arabia and OPEC countries have with the US in ensuring oil transactions remain denominated in dollars under the 1970’s Petrodollar agreement. But even this may be about to change as Saudi Arabia is drawn towards direct trading with China for oil. Saudi Arabia has even publicly stated that ties to the U.S. are open for renegotiation.[17]

One way in which China has been running down its estimated $1.5 trillion in treasury securities is by buying gold bullion. It has been doing this in very large amounts since 2011. China has a target volume of gold reserves that it is trying to build. No one knows precisely what that target is, nor how much gold China owns. The official reported figure at the end of 2016 is only 1,843 tonnes but the real number is certainly much larger. Diversifying out of the dollar is one reason why China is buying gold since it provides a hedge if the dollar devalues, another reason is that it may have future plans for a gold backed currency, at least in terms of commodity trading.

Beijing has now introduced renminbi gold futures contracts on the Shanghai stock exchange and a renminbi oil futures contract is expected to be launched in the near future. China has long wanted to reduce the dominance of the US dollar in commodities markets. Other commodity futures contracts will be set up over time. This will ensure that foreign traders in commodities and wholesale goods, in particular oil, can sell forward the renminbi they receive in return for gold, increasing the attractiveness of trade finance settled in renminbi compared with dollars. The crude oil futures market will be the first commodity contract in China open to foreign investment funds, trading houses and oil firms. The resulting circumvention of US dollar trade would also allow oil exporters such as Russia and Iran to avoid US sanctions by using this market. In time, renminbi payments for all commodities will have convertibility into gold using the Shanghai Gold Futures Market when it gains greater depth, making it superior to the dollar as a settlement currency. This would give China an advantage over nations only able to offer fiat currencies in exchange for oil, especially during times of financial crisis. The current lack of international confidence in the renminbi as a currency would become irrelevant if it is backed by gold.

All of these measures have been gradual. China has been implementing them quietly and behind the scenes. It is early days, but already, it is becoming increasingly clear that the world economy is dividing into two spheres: a dollar sphere in which central banks in Europe, Japan and many OPEC and third world countries hold their reserves in the form of US treasury debt of declining foreign-exchange value; and a BRIC-centred sphere, led by China, Russia, India and Brazil reaching out to include Turkey, Iran, most of Asia, large parts of Africa and major raw materials exporters that are running trade surpluses. In the BRIC-centred sphere, countries are gradually becoming well supplied with renminbi in order to trade directly with what will eventually become, on all measures, the biggest economy in the world.


So far the Chinese imperialist challenge to the US is economic and financial. However it still needs to break the stranglehold of dollar hegemony in order to further develop as a global economic powerhouse that can challenge US imperialism’s dominant role in the world. This will not be easy but by encouraging the growth of a free trade area outside of the dollar and providing a new financial infrastructure it hopes to achieve it.

This by no means implies that China is neglecting the necessary military build-up to back up this challenge. It launched its first aircraft carrier in 2011 and in June 2017 launched a record new 10,000 tonne guided-missile destroyer. It has been modernizing its navy, especially in the development of submarines to protect the maritime Silk Road and to defend territorial waters. It has no hope of contesting the US militarily on a global level so its aim is to develop sufficient military strength to defend its own regional interests. We have already seen this in the South China Sea where China is building artificial island bases and disputing rights to reefs and islands with other South East Asian nations. The purpose of this is to demonstrate to its neighbours that the US is powerless to prevent China doing what it wants in what it sees as its own back yard.

China’s strategy is based on the fact that, because the US is an outside power, its leadership in Asia depends on formal and informal alliances with countries in the region. Beijing appears to have decided that the best way to undermine US leadership is to weaken those alliances. By applying carefully graduated degrees of pressure on US-aligned countries like Japan and the Philippines over long-running territorial disputes, China is trying to show that the US is no longer willing to confront China on their behalf. For example, five months after Obama’s Asia Pivot speech[18], China called his bluff by launching the first of its direct challenges to US resolve in the East China and South China seas. It used armed ships to muscle the Philippines out of disputed waters around the Scarborough Shoal, which had traditionally been under Philippine control. When Manila asked for military support, Washington refused as it was not willing to risk a confrontation with China over an uninhabitable reef. Beijing won its point and soon Philippines President Duterte was making overtures to China. The more China succeeds, the more US leadership in Asia diminishes, and the further China’s power and influence will grow. The strategy is not simply about demonstrating US weakness in the Asia-Pacific region, it is also about leveraging China’s massive economic resources to buy the goodwill of neighbours in the region. The Chinese leadership believes that BRI will ultimately give China leadership of the entire Asia-Pacific region. President Xi Jinping calls this “a time of strategic opportunity” to challenge US leadership in Asia and build “a new model of great power relations” in Asia, with China at its head.

The dilemma for the US – and the threat for the world – is that over time China will catch up with the US militarily as well as economically. It’s a long way off. The US has 737 military bases (and more non-military installations) around the world in over 150 countries. It spends $600 billion a year on “defense”. Russia has just raised its expenditure to $131 billion and China to $66 billion. However at some point the US will arrive at the same dilemma which faced the German General Staff in 1914. Their calculation was that by 1916 they would lose what military advantages they had over their imperialist rivals so were facing a pivotal decision and thus gave the green light for support to Austria and Armageddon followed.

The world’s ruling classes know the consequences of the two previous world wars and that has been a major factor in the avoidance of another one so far. However, the other factor was that until recently there has not been a major power demanding a change in the 1945 world order. The Cold War remained largely “cold” because both the USSR and the USA had fundamentally “done well out of the war”.

The difference today is that the capitalism is on life support. The crisis that erupted in 1971-3 has never gone away despite all the technological changes it has provoked. Basically the capitalist world needs a major devaluation of capital if it is to restore profit rates and begin a new cycle of accumulation. They have tried everything else from Keynesianism to neo-liberalism ending up with the deregulated speculation which finished in tears ten years ago. Since then the system has been propped up by printing money and debt.

In fact, central banks are now the biggest owners of stocks and shares amounting to a staggering $15 trillion.[19] The US, European and Japanese Central banks are propping up bond and stock markets to the tune of billions every month. This keeps interest rates low, which is the only way this level of debt can continue. The tipping point will come when interest rates start to rise and make the astronomical levels of debt unsustainable. Central banks will not be able to take on the resulting debt burden as they did after the 2008 crash.

A major crash wiping out trillions of dollars would lead to a very deep depression and it’s difficult to predict what the social consequences of this would be for capitalism. And with all other options exhausted, the prospect of global imperialist conflict will be all the closer. The current USA-China rivalry will be the axis around which any conflict will take place.




2 Final list of founding members of the AIIB:

Australia, Austria, Azerbaijan, Bangladesh, Brazil, Brunei, Cambodia, China, Denmark, Egypt, Finland, France, Georgia, Germany, Iceland, India, Indonesia, Iran, Israel, Italy, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Laos, Luxembourg, Malaysia, Maldives, Malta, Mongolia, Myanmar, Nepal, Netherlands, New Zealand, Norway, Oman, Pakistan, Philippines, Poland, Portugal, Qatar, Republic of Korea, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Turkey, UAE, United Kingdom, Uzbekistan, Vietnam

3 According to Wikipedia -

4 The classic being Paul Kennedy’s The Rise and Fall of the Great Powers but there are a whole host of alarmist books mainly emanating from right-wing conspiracy theorists.


6 2009: Under the Obama administration, smart power became a core principle of his foreign policy strategy. It was popularized by Hillary Clinton during her Senate confirmation hearing on January 13, 2009 for the position of Secretary of State: Source: Wikipedia




11 World Trade Organisation Report 2009

12 China and Russia defence spending in 2016 was $131.57 billion and $66 billion respectively. So less than two fifths of US spending combined.

13 “China calls for new reserve currency” Financial Times 24 March 2009

14 “The US puts the World Bank under renewed fire” Financial Times 16 October 2017



17 Ahead of James Mattis’ meeting in Riyadh on April 18 2017 with Saudi King Salman bin Abdul-Aziz Al Saud and Deputy Crown Prince and Minister of Defence Mohammed bin Salman, Zuheir Harithi, the chairman of the Foreign Affairs Committee of Saudi Arabia’s Shura Council, told Al-Monitor that US policy in the past three years has been vague and confusing for the allies, including Saudi Arabia. He added that policies made during the Obama era need to be reconsidered in a way amenable to Gulf countries. He confirmed that there are positive signs indicating that Trump is serious in dealing with regional issues.

18 The “Pivot” or as the Obama Administration re-termed it “Rebalance” was a redirection of military resources that had been freed up by withdrawing forces from Afghanistan and Iraq to be redeployed in East Asia. In November 2011, Secretary of State Hillary Clinton claimed that the nation had reached a “pivot point” allowing it to “redirect” resources that had been going to the wars in Iraq and Afghanistan to Asia. The administration’s January 2012 defence budget guidance claimed that the Pentagon would “rebalance toward the Asia-Pacific and Middle-East regions.” Later, the Middle East was dropped.


Tuesday, February 13, 2018


A few of us were reading through and talking about this article, and we have a question. You write:

"The crisis that erupted in 1971-3 has never gone away despite all the technological changes it has provoked. Basically the capitalist world needs a major devaluation of capital if it is to restore profit rates and begin a new cycle of accumulation. They have tried everything else from Keynesianism to neo-liberalism ending up with the deregulated speculation which finished in tears ten years ago. Since then the system has been propped up by printing money and debt." (Emphasis mine)

We were wondering, what kind of "devaluation of capital" do you mean here? There are all sorts of forms that devaluation can take, including "printing money and debt", many of which, as we've seen, have not alleviated the crisis. So, we were curious to know if you had some other kind of devaluation in mind? We are very interested in the answer to this question and look forward to hearing your reply.

Good question. You are absolutely right that devaluation of different forms have been going on since the end of the post-war boom (not excluding the complete writing off of investment in certain cases). You are right too that printing money is a form of devaluation. Debt only acts as a form of devaluation if it is reneged upon or "forgiven" but debt as it stands is actually a claim on the future production of surplus value. In other words the future of capitalism is mortgaged. Some would say it always is but the question is one of scale. In 2008 they could have let the financial institutions fail but that would have produced the greatest collapse in capitalist history. As these institutions were "too big to fail" the solution was for their debts to be "nationalised" and transferred to the state. The state (whilst making its citizens pay in the form of welfare and other cuts) has tried to write down these debts assuming that once it bailed out the banks growth would resume and the surplus value generated would restart a round of accumulation (since this cycle went into its downward phase in the 1970s). After ten years this still has not happened although growth this year for the first time since then is slightly picking up. This though is unlikely to solve the deeper structural problems especially as this growth is also salted with yet more financial instruments (e.g. exchange traded equities) so that speculation remains a large element of the current "growth". Basically the system is in a bind. It needs massive devaluation (i.e. one that would bring about a massive crisis) but cannot allow it because it would be a disaster. The only alternative devaluation (tried twice last century) is an all out global war. There are a few amongst the capitalist class who might ponder this but the vast majority know the consequences and so for all the proliferation of proxy wars, and the disintegration of whole states around the planet because of them, the idea of an all out confrontation is usually shelved. However history does not stand still and what the China-US article tried to point out was that the increasing mismatch between US military power and Chinese imperial ambitions to build on its more recent economic growth create a potentially dangerous scenario. We don't think the devaluation of an all-out war is on the cards yet (but trade wars often precede shooting wars) since not all the preparations have been made but the rise of nationalism everywhere in response to the globalised capitalist juggernaut cannot be ignored.

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