China’s emergence as the world’s second-largest economy dates to the then-radical turn toward “reforms and openness” adopted in 1978 at the Third Plenary Session of the 11th CPC Central Committee.  The economic worldview of Mao Tse-tung emphasized the importance of agricultural peasant workers, a leap in economic hierarchy above the industrial proletariat at the core of traditional Marxist-Leninist thought.  The reforms launched under Deng Xiaoping, by contrast, were meant to modernize China’s industrial base, with manufacturing and market prices playing key roles.  Their origins can be found in the New Economic Policy of the 1920’s, which Lenin and the Bolsheviks were forced to adopt following the abject failure of war communism.  Though Maoist economics were abandoned under Deng, the visage of the late first chairman of the Communist Party of China’s central committee is widespread on various denominations of the nation’s monetary unit, the renminbi (the “people’s currency”).  These include smaller denominations (1, 5, and 10 yuan) as well as larger ones (20, 50, and 100 yuan).  The founding father of the People’s Republic of China is best known in the United States for his work Quotations From Chairman Mao (the so-called Little Red Book), with its revelatory observations like “In waking a tiger, use a long stick,” and “Passivity is fatal to us.  Our goal is to make the enemy passive.”  It also includes the quotation, “Political work is the life blood of all economic work.”  Mao thought strategically, and so do China’s present-day leaders.

The recent announcement that the Federal Reserve approved the application of China’s largest bank and two other mainland firms to purchase the U.S. subsidiary of the Bank of East Asia (BEA), based in New York, represents a milestone in the implementation of Maoist strategy.  Under the deal, the Industrial and Commercial Bank of China Limited (ICBC), whose majority owner is the Chinese government, is allowed to obtain up to 80 percent of BEA, which has 13 branches in New York and California.  The Fed also approved applications from two other Chinese banks to open branches in Chicago and New York.  The deals certainly qualify as “economic work.”  Though the Fed featured prominently in U.S. media coverage, its role was merely to rubber-stamp a deal approved at the highest levels of both governments.

One underreported angle is the difference between how the U.S. central bank and the Chinese view the transaction.  The Fed termed the transaction “relatively small,” while the Xinhua News Agency, the official media outlet of the PRC, quoted ICBC Chairman Jiang Jianqing as stating that “This unprecedented acquisition of a controlling stake in a US commercial bank by a mainland bank is strategically significant.”  The Communist Party controls China, as it did under Mao, but by embracing a hybrid state capitalism since 1978, they have found it more efficient to advance their political goals by reversing his maxim. The bank deal, from the Chinese perspective, certainly advances the strategy of economic power translating into political influence.  It also expands U.S. economic ties with the PRC, an approach embraced by every president from George H.W. Bush to Barack Obama.  China is now simply too big for any White House to ignore.

Trade and diplomacy, it has been argued, work to reduce tensions around issues like human rights and the future of Taiwan.  Establishment reasoning goes like this: West Germany and Japan were integrated economically after World War II, so economic trade with China serves to reduce the likelihood of a third conflict.  The reasoning behind the bank deal is not cut and dried, nor will it reduce the misgivings of military hardliners on both sides of the Pacific, who view the other through the lens of mutual distrust.  But it does foster the financial architecture required to achieve China’s ultimate end.

Joseph Schumpeter was among the earliest to note the importance of financial architecture to economic growth, though Americans are more likely to hear his phrase “creative destruction” misinterpreted to defend job losses.  Financial architecture includes the commercial banks at the center of the deal.  Every commercial transaction involving the yuan increases demand for the currency unit, a strategic Chinese goal.  Yuan were once near-exclusive to Maoist China, a largely agricultural economy.  Today, they circulate around the world as Chinese commerce, led by an industrial base with roots in “reforms and openness,” continues to expand.  Tomorrow, Americans will be able to purchase yuan-denominated time deposits, and at some point in this century, unless current trends are reversed, the yuan will emerge as the international reserve currency.

This is the goal of the People’s Republic of China: supplanting the U.S. dollar.  Unfortunately, Americans who do not understand this process will only find themselves poorer.