China's economy must look like it's doing great, but it has a number of serious problems. The main one is with its currency, the yuan. The Chinese government keeps the yuan at an artificially low level, which means it is much cheaper for people outside of China to buy goods from China. This, in turn, keeps the Chinese economy going by providing a plethora of jobs in manufacturing; this ability to provide employment underpins the legitimacy of the Communist regime. However, it also harms manufacturers everywhere else in the world because they have to compete with cheap Chinese products.

When the global economy crashed China faced a major problem: the rest of the world was suddenly not so willing to put up with this damage to their manufacturing sectors. This is visible in the U.S., where talk of protectionism is on the rise. For China, trade barriers would be catastrophic: a third of its GDP comes from exports, as do hundreds of millions of its jobs. Without these jobs, the Chinese political system would be placed under severe and possibly terminal strain. The damage to China would be immeasurably more severe than the damage the Chinese can do to the U.S. by ceasing to finance American budget deficits by plowing dollars back in, as currently happens.

China will eventually have to allow its currency to become rationally priced. This is going to mean the end of its decades-old economic model, and making its own people richer - so they can buy Chinese products themselves - rather than carrying on as the world's sweatshop. This will also have severe consequences for its political system, because richer people demand more freedom. How this process is managed will determine much of the history of the coming century.


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