For war you need money. For money, read credit; for credit, read trust. As China and the United States rub up against each other, the former can appear to have the financial wind in its sails, while the US looks dead in the water. But it is in the area of trust in their currencies that China lacks power on the international stage (and to wage war); there the US can still hold sway. That, too, can change, if Beijing wills it.   - Francesco Sisci

BEIJING - The recent friction between China and the United States over flights of surveillance planes along China's coasts and Beijing's allegations of foreign meddling in the issue of the Hong Kong's elections - a thinly veiled denunciation against the US - show apparent strain in China's trust of Washington. In some ways, then bilateral ties are at a new low, possibly similar to the time in April 2001 when a Chinese plane crashed into a US EP-3 surveillance plane and the EP-3 made an emergency landing on Hainan, an island in southeast China and the country's most important submarine base.

Yet before looking at the particular situation, we may want to take a broader approach to some of the issues of power and power management, starting from something dear to the hearts and minds of many, West and East: money.

Napoleon said that for war you need three things: money, money, and money. For this reason, he was clear that the battle against his main enemy, London, had to be fought on the money front, before even fielding an army. In 1806, he issued the Berlin Decrees, which brought into effect the Continental System. It was a policy aimed at eliminating the threat of the United Kingdom by closing French-controlled territory, ie de facto all of continental Europe, to its trade. Europe was the steam engine of the global economy, and if the UK was cut off from this engine, it was bound to dwindle and perish, reasoned the inventor of modern warfare and his followers.

However, it did not work like that.

The UK had the greatest industrial capacity in Europe, had a better financial system than France and the continent, and its mastery of the seas allowed it to build up considerable economic strength through trade to its possessions in its rapidly expanding colonial empire. All these elements actually helped London turn the tables on Napoleon. The UK war effort was willingly supported by crowds of investors and taxpayers, despite the higher taxes on land and a new income tax.

By contrast, the French financial system was inadequate and Napoleon's forces had to rely in part on requisitions from conquered lands, [1] something that riled conquered peoples against the officially universalist call of the French revolution. The UK paid for Russia and Austria and kept them hostile to France. This eventually undermined Napoleon and his system.

France then was the China of its times. With a population almost three times as large as that of Britain, very efficient agriculture (then the main engine of production and wealth), growing modern industry and science, and a culture that dominated Europe, where all elites spoke French and had read the philosophes. Yet France, with little intercontinental trade, without the best modern industry and finance, financed its war efforts by selling acquired land, as it did with Louisiana to the US, and it failed. Napoleon, as he clearly saw it, didn't have the money for war.

Money in fact is not simply hoards of cash; it is an expression of credit, transferable trust, and responsibility, as is beautifully described by Felix Martin. He says, "In essence, money comprises three things: a concept of universally applicable economic value; a system of account-keeping whereby the value can be measured and recorded; and the principle of decentralized transfer, whereby that value can be transferred from one person to another." [2]

This, in turn needs also a system of shared, common broader values allowing the free circulation of credit and trust in a society. In fact, even in highly monetized societies some services and goods can be repaid in kind, in exchange in favors of various kinds, can be given for free (meaning the giver and the receiver expect to obtain from the exchange other than cash, a reward from the neighbor or from God) and not in cash.

This capability for money used to be limited to within one country, and was dominated first by the necessities of the sovereign then expanded to include the new growing requirements of credit of banks to industries and investors in societies which have grown ever more complex and out of the simple reach of the sovereign. Credit comes from the Italian credito, to be believed, to be trusted. That is, money can be issued when there is transferable trust based on the three points made by Martin.

This ability has been expanded to a global dimension with the necessities of the globalized economy and the system of Bretton Woods, established 70 years ago after World War II with the US dollar underpinning it. International trade is still based on these elements and the credit/trust of one country, the United States, has been extended to the whole international system creating an almost seamless body between the US, international trade, industry and finance, and the global necessities. The US, with its dollar, so far, has been the only country able to provide all the necessary "infrastructure" and possess all the necessary trust for international trade and exchanges.

In order for the Chinese yuan (or renminbi) to become an international currency, many steps need to take place. It should become fully convertible, and it should run an import surplus for a few years, to get out enough currency to allow foreign countries to operate with it. Furthermore, China should learn the subtleties of a global economy where China's and foreign interests are aligned. All these elements and more are present with the US dollar, which has been running as a national currency but also as guidance to the international monetary system for the past 70 years.

The current rise of the yuan is one of convenience and expedience. China is a large trade power, and it is becoming easier to trade with China accounting in Chinese currency. Besides the yuan, there are the euro and dollar, which have weaknesses of their own that aided the strengthening of the Chinese money.

The euro, although it has an international market, is a currency without a country or a government, and thus it has limited responsibilities and can be trusted only in a limited way - it is not and it will not be in the foreseeable future a real challenger to the dollar's international role.

The US in recent times has occasionally looked irresponsible. It has been running huge trade deficits for many years, possibly out of proportion for its present economic size; in 2008, it started an international financial crisis that almost melted down the global economic system; it is embroiled in what is now its 14th year of continuous war and turmoil in the Middle East and central Asia - something that it started or abetted.

To top it off, the US has jumped into a growing stand-off with Russia, which might have been just too keen to use the American difficulties in the Middle East to its own advantage. These troubles have to be gauged carefully. All these problems would have wiped out any country, but for the US, they just dented its international political and financial role.

In the 19th century, the strong role of the British pound sterling was based on its widespread intercontinental empire and on its virtual monopoly on global trade, something that Germany never had, although it dominated continental Europe for almost half a century, the heart of the economic and political system at the time. German industry under Chancellor Otto Bismarck quickly caught up with the British, German culture and science became the hallmark of modernity, and the deutschmark was certainly reliable - yet it never became quite as reliable as the British pound.

The Chinese yuan is still a long way from Napoleon or Bismarck's currency. Its recent expansion in usage does not hide the fact that so far it is only a one-way street. The yuan is not used in trading between countries only marginally dealing with China. And if it were to become used in these exchanges, would the Chinese monetary authorities have the technical and political know-how to deal with the underlying complexities? Or would it soon spin out of control?

In fact, the yuan is still very hooked on the US by two fetters: it has a crawling peg with the US dollar that limits its fluctuations, and most of its burgeoning reserves are in US Treasury bonds. To shake off either would not come easy or cheap in the present situation.

The issue should be: if money is transferable trust, how can China gain international trust? In that case, the path should be the following: get the trust, then get the money, and then get sound allies to advance the common cause, and eventually, if necessary, fight with the allies in an indispensable war.

Isn't China in this position now? China is not poor - it has the largest reserves on Earth, at almost USUS$4 trillion and counting. But to better assess the situation, we must look at how China gained its present wealth.

Basically, it happened in two steps, as the US has lent its own global trust to China for the past 30-odd years. In the early 1980s, America allowed a transfer of technology to China and an initial flow on investments there; a second step occurred in the late 1990s, when the US allowed China into the international trade organization (first called the General Agreement on Tariffs and Trade, now named the World Trade Organization). These two steps made China the beachhead and the forefront of the globalization process that was largely led and engineered by the US.

The Chinese contribution to US-led world trade has been massive - so much so that it would be hard to undo it. It would be hard now for the US to unplug China and expel it from this system, also because China has gained a solid niche for its own products. Chinese goods have a very good price-to-quality ratio that makes them an essential part of the whole economic system; plus the promise of its internal market consumption as a future engine of growth underscores its international role. With these important contributions, China has been gaining some trust on its own.

However, this trust/credit is a far cry from gaining a real international trust. What has been happening in US-China relations since 2009-2010 is that the US has been withdrawing the blank check of trust it had given to China before. This plus some forceful moves China took with its neighbors are elements denting China's hard-gained international trust.

However, it is not a clear path to weakness for China either, because there have been several American mistakes. With the Ukrainian crisis, the US has been throwing Russia into China's arms, something that might open the possibility of the US being cut off from the Eurasian continent, reversing decades of US global strategy (see also Eurasia needs a Sino-German axis, Asia Times Online, August 1, 2014).

As we saw for the past 30-odd years of development bolstered by American trust, China has saved enormous amounts of cash, and it could take some time to use it up. However, despite this cash, China is not gaining more trust on its own. International business circles often complain about harsh Chinese practices. Chinese businessmen are blamed for thinking short-term, eager to reap maximized profits only for themselves without taking into account business partners and crushing anything and anybody before them.

Surely, these are not exclusive Chinese characteristics. There is nothing new under the sun - these are early capitalist customs. Yet, this is not the 19th century, it is not even the 20th century, and businesses are expected to have broader, more comprehensive cultural sensitivities - otherwise money could vanish or turn into dust. The question should be: how might a country transform its cash stockpiles into real money, globally transferable trust?

Moreover, there is a bigger issue in how to look at the world order that is underlying the trust needed for the monetary system. Incidentally, this issue has been also broached by the research of Chinese philosopher Zhao Tingyang.

The Chinese traditional view was to oppose zhi (set order) and luan (chaos). [3] That is, the traditional Chinese view was to bring order to chaotic situations - chaos had to be defeated, eradicated.

Both characters have to do with water. Zhi is clearly the ideogram of water held in check with an embankment. Luan (according to the Kanxi dictionary quoting the ancient Erya dictionary [4]) is when a river stops to correct course, overflows, and floods the land - something that ancient Chinese learned to keep in check through a system of embankments directing and harnessing the force of the waters. The failure of the right flow of water caused not simply inundation but the deep disruption of an orderly and safe life.

However, the present capitalist system was born and thrives on the idea that chaos should not be eradicated and set in order. Chaos, the chaotic search to maximize one's profits, is what will give birth to new developments and growth, according to Mandeville's seminal analysis that inspired the research of Adam Smith. Chaos has to be carefully and cautiously managed, but not eliminated.

This is a further cultural challenge for China, and yet one can simply look at the booming economic activities in China now to see that the lessons from Adam Smith have been de facto fully accepted. However, it is extremely difficult to translate the system granting individuals the right to maximize their profits into a cultural and political structure guaranteeing the international economy. The Anglo-Americans took over two centuries to get where they are now, and there are still many problems.

Notes:
1. Roger Knight, Britain Against Napoleon: The Organisation of Victory, 1793–1815 (2013)
2. Felix Martin, Money, The Unauthorized Biography (2014), pp 263-264.
3. See my Another China, (2001) chapter 1
4. See here http://baike.baidu.com/subview/432633/5109856.html

Francesco Sisci is a Senior Researcher associated with the Center for European Studies at the People's University in Beijing. The opinions expressed are his own and do not represent in any way those of the Center.