The general attitude I have encountered (which is obviously fueled by how the mainstream media chooses to report this issue) is that China's government is likely to retain the dollar-peg either because a) that has been its policy throughout the last decade; or b) that China is somehow “trapped” into maintaining the “peg”. I firmly believe the exact opposite: that China's government is very close to abandoning the dollar-peg, and (in fact) has made a multitude of preparations to do so.

Obviously, the first and more simpler basis for believing the dollar-peg will continue is easiest to address, so I will begin with that. While it can always be seen as simplistic to conclude that some trend will continue, simply due to some form of “inertia” (or just habit), we live in a universe where inertia is one of the most dominant forces.

Thus, the “inertia” argument must always be considered carefully. I would argue that the appropriate way to conduct such an analysis is to look at what caused a particular event/trend (in the first place), and whether those causative factors still exist. Once any particular trend (especially an economic trend) is no longer being driven by anything other than “past practice”, than the probability that such a trend is about to end rises considerably.

Looking back to when China first chose to link its currency to the U.S. dollar in this manner, in April of 1994, there are several obvious factors to list. First of all, China had a much less-mature economy. It was a smaller economy, in absolute terms. It was much earlier in the major transition from a primarily agricultural, peasant population to a much more urbanized, 21st century society.

Because of this, it lacked the population centers and distribution networks which must be present before a stronger, more consumer-oriented domestic economy can take hold. In turn, lacking a large domestic economy, its rapid industrial expansion was inevitably dependent on continued strength with its exports.

What China already did have was a population with rapidly rising incomes, large pools of savings, and a manufacturing base that has clearly established it as the new, global leader in many categories of production. In other words, China possesses many of the same characteristics today as were seen in the U.S. economy – just before it became a global, consumption-juggernaut.

While dogmatic idealogues may choke on the notion that China is “following in America's footsteps”, China has long since stopped being a “communist” nation in any remotely literal sense. Unfortunately, many of the people who insist on using labels, use the wrong ones, time and time again.

“Communism” and the sort of breath-taking industrial expansion currently taking place in China are simply not compatible. While “communism” may not prevent the leading Communists from setting aside a larger piece of the pie for themselves, it has always prevented the amassing of large personal fortunes through open commerce – which is officially anathema in any true, communist society.

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