per year), which pushed the average inflation rate during this period up to 7.8%. From 1997 until 2005 it was
firmly pegged at 8.28 yuan per USD though not freely traded. In July 2005 the RMB was de-pegged from the USD
and was managed against a basket of foreign currencies (starting at 8.11 yuan per USD). Since then the RMB has
had some fluctuations but hasn’t depreciated below the 2005 rate (when de-pegged). The chart on the left shows
the spot price in USD terms and the one on the right shows it in gold terms. As shown, since 2014 the RMB has
declined a bit (by about 2% per year) versus the dollar and a bit more (8% per year) against gold.
Because the interest rate earned from holding the Chinese currency was not included in these spot prices and the
interest rate one would have received by holding the Chinese currency was higher than the average interest rate
from holding dollars and was higher than the 0% interest rate one gets from holding gold, the total returns of
holding China’s RMB were higher than shown in the previous charts. As of now I only have Chinese interest
rates going back to 1980; the chart shows the estimated total return of holding the Chinese currency since
then in terms of both dollars and gold.
30
The key to running a sound currency policy that produces a sound credit system that works for both borrowers and
lenders is to not have the currency produce any big rises or declines in relation to either other leading exchange
rates or goods and services prices. China has been managing the exchange rates and the interest rates to do that
since around 1985.
That brings us up to date. On Thursday September 24th, I’ll be releasing the follow-up chapter to this one, which is
about US-China relations and wars. Unlike the prior ones that were on the past, that chapter is about the most
important things that are going on between these two countries now. If you found this one interesting, you’ll find
the next one even more so.
[1]When I decided to study China’s history to understand its patterns I wanted to begin with the beginning of
advanced civilization and I couldn’t find its beginning because it went back so far. I would have had to start more
than 2,000 years before Christ and I wouldn’t have started at the beginning. I chose to superficially look at what
happened around 2070 BC by looking at the Xia Dynasty, which brought us the Bronze Age, writing, and the
stratification of society along political and religious lines. I started to look a bit more carefully around 500-600
BC, so that I could start around the time of Confucius and Confucianism, and Lao Tzu and Taoism, which has
shaped how the Chinese are with each other and with others. Understanding them and their thinking is even more
important to understanding Chinese thinking than understanding Jesus, Aristotle, and Socrates is to understanding
Western thinking. Then I quickly worked my way to the year 600 AD to just before the Tang Dynasty and looked