HowWealthWorks.com

[Suresh]

China recently has curtailed bank lending and now has imposed some sort of ban on companies in the industrial and property sectors from raising capital in the equity markets to repay bank loans.

China is sitting on nearly $2 trillion in foreign exchange reserves.

China is also encouraging its citizens to buy gold in various forms.

Perhaps, all these facts can be reconciled. China's policymakers may have already decided that Western importing nations will never rebound to the extent necessary to soak up excess industrial capacity and justify excessive construction in China. If the largest consumer market of Chinese products is no longer outside China, then a weak yuan is no longer useful. China's policymakers may have decided that the next trade boom will not be another export boom, but rather a boom in intra-province trade between the Pacific Coast provinces and more interior, rural provinces. If so, then China's bank lending/asset bubble blowing may not have been an accidental policy, but rather an intentional policy tied into its promotion of gold to its masses.

Excessive bank lending gets physical assets (e.g., office buildings, stadiums, railways, and manufacturing plants) built. Excessive bank lending also builds up necessary labor skills in hundreds of millions of workers on China's Pacific Coast. Any monetary losses of debt holders perhaps will be covered using China's foreign exchange reserves to either recapitalize Chinese banks or make good on unpayable debts to foreign creditors. Additionally, profits from asset bubbles can get funneled into gold. Gold in the hands of citizens may later be turned into legal tender via government minting, as conjectured by brasschecktv. As more and more gold is made legal tender, the yuan becomes in effect partially gold-backed and therefore inherently more valuable than other global currencies. The stronger yuan gives Chinese greater purchasing power of foreign goods and services, keeping the proletariat content and the ruling elite in power.
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FT Alphaville: China: First the banks, now the corporates

First it was the banks and now, in a slightly less dramatic but possibly more potent warning to any investor who ever contemplated buying shares in a listed Chinese company, it’s the corporates. As the FT reports on Thursday:

[Suresh]

Many of us are aware that China was perhaps the first country to use paper banknotes -- around 806 AD. However, less well-known may be China's experience with hyperinflation during the course of using fiat currencies. China's multiple experiences with hyperinflation may inform current policymakers in China as to the long-term viability of a fiat currency.
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The Market Oracle: Historic and Current Hyperinflation From Across the Globe
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China (1939-1950)
China first started using paper money under the reign of Emporer Hien Tsung in 806-821 AD due to a shortage of copper for making coins. The Europeans would not know about paper money till Marco Polo account of it in his Travels some 450 years later. Paper was issued again in 910 A.D. and become regular after 960 A.D. By 1020, the quantity of Chinese paper money has reached excessive levels. In 1160, the paper issues have become so numerous that they have become worthless. Emporer Kao Tsung begins reforms with a new issue to replace the old. By 1166 China is experiencing hyperinflation. This occurs again in 1448 with the Ming note. Some years later around 1455, China abandons paper money after over 600 years of experience. Europe would not begin using bank notes till 1661 with the first issue from the Bank of Sweden.

China saw an extended period of hyperinflation shortly after the Central Bank of China took complete control of the money supply and began issuing fiat currency. In June 1937, 3.41 yuan traded for one US dollar. By May 1949, one US dollar fetched 23,280,000 yuan for anyone who cared to have some. For more information on the subject click here.
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Daily Reckoning: Fiat Currency: Using the Past to See into the Future
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Fiat Money -China — Flying Money

When the Chinese first started using paper money, they called it “flying money,” because it could just fly from your hands. The reason for the issuance of paper money is simple. There was a copper shortage, so banks had switched to the use of iron coinage. These iron coins became overissued and fell in value.

In the 11th century, a bank in the Szechuan province of China issued paper money in exchange for the iron coins. Initially, this was fine, because the paper money was exchangeable for gold, silver, or silk. Eventually, inflation began to take hold, as China was funding an ongoing war with the Mongols, which it eventually lost.

Genghis Khan won this war, but the Mongols didn’t assume immediate control over China as they pushed westward to conquer more lands. Genghis Khan’s grandson Kublai Khan united China and assumed the emperorship. After running into some setbacks with paper currency, Kublai eventually had some success with fiat money. In fact, Marco Polo said of Kublai Khan and the use of paper currency:

“You might say that [Kublai] has the secret of alchemy in perfection…the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.”

... Marco Polo went on to say:

“This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burma, Cochin China, and Tonkin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power, and progress.”

Wait a second, I thought we were bashing fiat currencies here…Can anyone say crackup boom? ...

“Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both…All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves…The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”
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Suresh

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