【中英對照】Ray Dalio 中國大週期和貨幣 The Big Cycle of China and Its Currency (三):中國的經驗及運作方式 China's Lessons and Its Ways of Operating


The Chinese culture developed as an extension of the experiences the Chinese had and the lessons they learned over the millennia. They were set out in philosophies about how things work and what ways work best in dealing with these realities. These philosophies made clear how people should be with each other, how political decision making should be done, and how the economic system should work.



In the Western world the dominant philosophies are Judeo-Christian, democratic, and capitalist/socialist. Each person pretty much chooses from these to come up with the mix that suits them. In China, the main ones were Confucian, Taoist, and Legalist until the early 20th century when Marxism and capitalism entered the mix. The most desired mix to follow has historically been the emperor’s most desired mix.



Emperors typically study Chinese history to see how these have worked and come up with their own preferences, put them into practice, learn, and adapt. If the mix works, the dynasty survives and prospers (in their parlance it has the “Mandate of Heaven”). If it doesn’t, it fails and is replaced by another dynasty. This process has gone on from before history was recorded and will go on as long as there are people who have to decide how to collectively do things.



While I can’t do these philosophies justice in a couple of sentences each without digressing too deeply, here is the best I can do:



Confucianism seeks to bring about harmony by having people know their roles in the hierarchy and know how to play them well starting from within the family (between the husband and the wife, the father and the son, the older sibling and the younger sibling, etc.) and extending up to the ruler and their subjects, with them bound together by benevolence and obedience. Each person respects and obeys those above them, who are both benevolent and impose standards of behavior on them. All people are expected to be kind, honest, and fair. Confucianism values harmony, broad-based education, and meritocracy.



Legalism favors conquest and unification of “all under heaven” as soon as possible by an autocratic leader. It believes that the world is a “kill or be killed” jungle in which the strength of the emperor’s central government and strict obedience to it must exist without much benevolence given to the people by the emperor/government. The Western equivalent is fascism.



Taoism teaches that the laws of nature and living in harmony with them are of paramount importance. Taoists believe that all of nature is composed of opposites and that harmony comes from balancing them well—yin and yang. This plays an important role in how the Chinese seek the balance of opposites.



Of these, Confucianism and neo-Confucianism have been the most influential through time, usually with some Legalism thrown in, up until the early 20th century when Marxism gained favor with Mao and then with his successors.





All of these Chinese systems from the beginning of recorded history were hierarchical and non-egalitarian. I was told by one of the most senior Chinese leaders, who is also a highly informed historian and an extremely practical top policy maker, that the core difference between Americans and the Chinese is that Americans put the individual above all else and the Chinese put the family and the collective above all else. He explained that Chinese leaders seek to run the country the way they think parents should run the family—from the top down, maintaining high standards of behavior, putting the collective interest ahead of any individual interest, with each person knowing their place and having filial respect for those in the hierarchy so that the system works in an orderly way.



He explained that the word “country” consists of two characters, “state” and “family,” which represents how the leaders view their roles in looking after their state/family—like strict parents. So one might say that the Chinese government is run from the top down (like a family) and optimizes for the collective while the American approach is run from the bottom up (e.g., democracy) and optimizes for the individual. (These differences of approach can lead to policies that those on the opposite side find objectionable, which I will explore in more detail in the next chapter.)



As far as how the governance structure works (i.e., who reports to whom in the hierarchy within the central government and how that extends down to interactions with regional and local governments), that has evolved over thousands of years and many dynasties into well-developed approaches that I won’t get into because the digression would be too great.



However what is clear is that there are well-established structures in which the emperor has ministers who are responsible for different domains that extend down to interacting with the provinces and municipalities via a large bureaucracy, and, at the same time, there have always been lots of fights to keep and get control of power by the emperors and the people who report to them.


當代中國最受尊敬的學者告訴我,中國37% 的皇帝是非自然死亡的,而且他們經常被周圍的人在政治鬥爭中殺死。中國的政治歷來是殘酷的。

I was told by Zhiwu Chen, who is one of the most highly respected contemporary Chinese scholars, that 37% of emperors died unnaturally and that more often than not they were killed by the people around them or others in political struggles.[7] Politics in China has traditionally been brutal.





Geographically China is basically one giant plain surrounded by big natural borders (mountains and seas) with a giant population in that plain. For that reason most of China’s world was within those borders and most wars were for control of it and were fought within those natural borders, mostly between the Chinese themselves, though sometimes between foreign invaders and the Chinese.



As far as wars and the philosophies about them are concerned, the goals have traditionally been to ideally win wars not by fighting but by quietly developing one’s power so that it is greater than the opponent’s so that one can then show it and have the opponent capitulate without fighting. There is also the extensive use of psychology to influence the opponents’ behaviors to produce the desired results.[8]



Still there have been numerous violent wars inside of China over the dynasties, though there haven’t been many outside of China. Those that were outside China were for the purpose of establishing China’s relative power, security, and trade, not for occupation.



Scholars believe that China’s lack of significant expansion of its empire outside of China is because the land mass of China is so large that controlling it has been more than enough to handle, because it is has largely been self-sufficient in resources, and because they have preferred to maintain their culture with a purity that is best achieved through isolation. Unlike other great empires that have conquered and occupied other countries, it was relatively uncommon for China to occupy distant states.



Traditionally the Chinese have preferred to enter into relations with empires outside their borders in a manner that is similar to what one might expect from the previously mentioned philosophies—i.e., with the parties knowing their places and acting accordingly and with their places determined by their relative powers.



For example, if China is more powerful, which was typically the case in its region, the less powerful states typically paid tribute to China with gifts and favors and in return typically received guarantees of peace, recognition of their authority, and trading opportunities. These subordinate countries typically maintained their customs and experienced no interference in how their countries were run.





As far as Chinese money, credit, and the economy are concerned, the history is very long and complicated and went through the full range of money/credit/economic systems and cycles that were described in Chapter 2 and its appendix, so what happened in China is basically the same as what happened all around the world through the millennia, though exactly when and exactly how is a bit different.



More specifically, inside China like outside China there were the various types of monetary systems used and currencies issued by all sorts of entities with all the systems operating in the ways I described. Within China, the currency most used through the millennia was metal (mostly copper), and debt cycles like those described in Chapter 2 took place for the same reasons (i.e., debts created buying power so providing them made people feel richer and raised the economy and wealth and were allowed to grow to become much greater than the amount of money needed to service them and the amount of money grew much faster than the amount of goods and services that it could buy).



In these big debt cycles there were stable periods when debt growth wasn’t excessive, bubble periods when debt growth was excessive relative to levels that could be sustained, debt crisis periods when there wasn’t enough money to service debt, and printing of money periods in which money was printed to alleviate the debt crises, which produced hyperinflations.



Internationally (and sometimes domestically) silver was the main metal currency used, though gold was also sometimes used. As for the economy’s changes, the system went from being primarily agricultural and feudal through many manufacturing incarnations such as the Bronze Age and the Iron Age, including various approaches to trading with foreigners/barbarians (most importantly through the Silk Road), which built a rich merchant class that produced cycles of big wealth gaps and the wealthy having their wealth taken away from them.



Throughout China’s history private entrepreneurial businesses were sometimes allowed, which typically also produced wealth and wealth disparities that led to redistributions of wealth and the businesses and other assets being taking over by the government. These also occurred in big cycles. For example, there were an untold number of changes in approaches created and destroyed for the building and the dividing of wealth. Consistent with China being an intelligent and industrious society, there were many technological inventions created that moved the economy forward. They occurred in the archetypical ways that were described in the earlier chapters.





While most things were the same, there were some different monetary and economic tendencies in China. For example, there was a strong tradition of using copper coins, even after China invented paper money in the 9th century and up until the introduction of the yuan in the late 19th century.






The following charts convey some information about how Chinese money and credit passed through these cycles. As I explained in Chapter 2, “The Big Cycle of Money, Credit, Debt, and Economic Activity,” there are three basic types of monetary systems in which 1) money has intrinsic value (like gold, silver, and copper coins), which I call a Type 1 monetary system, 2) money is linked to assets that have intrinsic value, which is paper money that can be exchanged for gold or silver at a fixed price (a Type 2 monetary system) and 3) money that is not linked to anything, which is called a fiat monetary system (a Type 3 monetary system).



As explained, these have historically changed from one to another as the weaknesses of each become intolerable. The diagram below conveys an ultra-simplified picture of how these currency systems have rotated through China’s history since the Tang Dynasty.



In fact it was much more complicated than this as different parts of China often had different currencies and at times coins and ingots from other countries (e.g., Spanish silver dollars in the late 16th century) that changed more frequently than what is conveyed in the chart. Still the chart is broadly indicative and meant to show that they had the full range of monetary systems that worked essentially the same as elsewhere in the world, most importantly with the cycles of hard money leading to debt problems leading to the abandonment of hard money leading to high or hyperinflations leading to the return to hard money.



The chart below shows inflation rates going back to 1750, which reflects the changing value of money. The periods of relatively stable inflation early on were largely the result of China using metals (silver and copper) as money. Instead of a central currency being printed, raw weights of metals were exchanged as money (i.e., there was a Type 1 monetary system). When the Qing Dynasty broke down, provinces declared independence and issued their own currencies through their silver and copper and valued by their weights (i.e., the Type 1 monetary system was retained), which held their value which is why, even during this terrible period, there was not an exceptionally high level of inflation measured in this money. However debt (i.e., promises to deliver this money) grew in the 1920s and 1930s, which led to the classic debt cycle in which the promises to deliver money far exceeded the capacities to come up with the monies to deliver so there was a default problem, which led to the classic abandonment of the metal standard and the outlawing of metal coins and private ownership of silver.





As previously explained, currencies are used for 1) domestic transactions, which the government has a monopoly in controlling and can get away with them being fiat and flimflam, and 2) international transactions, in which case the currencies must be of real value or they won’t be accepted.



As a rule, the better money is that which is used for international transactions. The test of the real value of a domestic currency is whether or not it is actively used and traded internationally at the same exchange internationally as domestically. When there are capital controls that prevent the free exchange of one’s domestic currency internationally that currency is more susceptible to being devalued, which is also why one of the standards for being a reserve currency is that there are no capital controls on it. So, as a principle, when you see capital controls being put on a currency, especially when there is a big domestic debt problem, run out of that currency.



In China in the mid-1930s two currencies existed—one that was fiat paper that was used domestically and one that was gold and silver that was used for international payments. The fiat paper one that was used domestically was printed abundantly and devalued a lot, even as the government issuing it controlled less and less territory as it lost the civil war, which is why we see the hyperinflation shown in the chart during that period.



Remember, as a principle, get out of fiat currencies during debt crises and wars because they will be printed a lot to fund debt payments, which will lead them to be devalued and to high or hyperinflation.



As shown in the chart below, after the turbulence of World War II and the civil war, in December 1948, the first RMB was issued as a fiat currency that was kept in limited supply to end the hyperinflation. In 1955 a second issuance of RMB was made, and in 1962 a third was issued. From 1955 to 1971 the exchange rate was fixed at 2.46 to the US dollar. From 1972 through the late 1970s, China did a better job of restraining money and credit. You can see another round of high inflation from the late 1970s to the early ’90s. It was caused by the global devaluation of money against gold in 1971, global inflationary pressures, China phasing out its price controls, easy credit, and lack of spending controls among state-owned enterprises. In 1996 convertibility was allowed for current account items but not for the capital account. From 1997 until 2005 the exchange rate to the dollar was kept at 8.3. In 2005 the peg with the dollar was ended.



The charts below show the value of Chinese currency in dollar terms and in gold terms since 1920, plus the inflation and growth rates over this period. The history for the currency rates is so fragmented before that that it is not worth referencing. As you can see, there were two devaluations, one at the setting up of the new exchange rate in 1948, and a series of devaluations from 1980 until the early 1990s, largely aimed at supporting exporters and managing current account deficits,[11] which led to the very high inflation during that period. As shown, growth was relatively fast and erratic until around 1978, then fast and much less erratic since 1978 until the recent brief plunge due to COVID-19.





Generally speaking the very long and volatile history of markets and economies has given the Chinese, and especially Chinese economic policy makers, the same sort of deep and timeless perspectives about money, debt, and economies as they have for other history.


然而,這並不完全正確。 雖然它給了大多數中國人強烈的儲蓄欲望和恰當的風險意識,本能地驅使他們保存安全流動資產(如現金存款)和有形資產(如房地產和一些黃金),大多數中國投資者在股票和風險債務等風險較高的資產方面有經驗有限,因而他們在這些領域表現得仍相對天真,但他們學習得非常快。

However, that is not totally true. While it has given most Chinese a strong desire to save and an appropriate sense of risk that innately drives them to save in safe liquid assets (e.g., cash deposits) and tangible assets (e.g., real estate and some gold), most Chinese investors have limited experiences in some riskier assets such as equities and risky debt, so they can be naïve in these areas, though they are learning very fast.



When it comes to policy makers understanding how money, credit, monetary policy, fiscal policy, and the economy work, and how to restructure bad debts, I have found China to have great perspective and to be world-class.



Now let’s look a bit more closely at China’s history from 1800 until now.




Ray Dalio 中國大週期和貨幣 The Big Cycle of China and Its Currency (一):背景

Ray Dalio 中國大週期和貨幣 The Big Cycle of China and Its Currency (二):中國歷史簡述




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