Chinese President Hu Jintao has stated that the U.S. dollar-denominated currency system is a “product of the past”.  The article is here.  Chinese politicians have been more critical of the Federal Reserve lately due to low interest rates and the second round of quantitative easing (money creation), also known as QE2.

These statements by the Chinese president remind me of American politicians criticizing the other party.  I don’t disagree with a lot of what he said, but have you looked in the mirror lately?  China has had monetary inflation above 20% per year.  This has fueled a speculative boom in real estate, similar to the one experienced in the U.S.  The bust is coming in China and it is all because of the same or similar policies.

It is true that the U.S. dollar is slowly losing its status of being the reserve currency of the world.  It is not because of China or any other country.  It is simply the incompetence and corruption of the U.S. government that has caused this.  The big spending and money creation has led to a decline in confidence in the U.S. dollar.  I hate to break the news to the Chinese politicians, but the yuan will not be taking the place of the dollar as the reserve currency any time soon.

China is still referred to as a communist country.  In some ways it is, but in some ways it is freer than the U.S. and other western countries.  China does not have the American for Disabilities Act.  It does not have as much red tape in many areas.  China has come a long way in the last 3 decades.  It has liberalized its markets in a lot of ways, but it also has a long way to go.  They have loosened their grip on the yuan, but it is still not a freely traded currency like the dollar, euro or yen.

I see a crash coming in China.  It will be painful for a country that has never had a big boom-bust cycle before.  When you are always in a state of bust, as China was, you are not used to a bust after a boom.  I see the growth in China over the last 30 years in two ways – part of it is illusory (artificial boom) and part of it is real.  The real part of it has actually contributed to an increase in the standard of living of tens of millions of Chinese people (maybe hundreds of millions).

China’s president is right to criticize the Fed.  His government is going to get stiffed by all of the U.S. bonds that it owns.  The problem is that China is still a mercantilist country.  At least it seems to be heading in the right direction.