China’s banking sector has historically served as a party-managed feeding trough for its inefficient, unprofitable state-owned enterprises (SOEs), most of which had been technically insolvent. Beneath such circumstances, the principal task of a central bank is to instill a sense of confidence amongst native residents and international trading companions within the credibility of the local foreign money as a viable and stable unit of account and within the prudence and duty of the domestic monetary system. Unfortunately, many LDC central banks have limited management over the credibility of their currencies as a result of fiscal policy – and enormous fiscal deficits – name the tune and must be financed either by printing money or via overseas or domestic borrowing. In both case, extended deficits inevitably result in inflation and a lack of confidence in the forex.
For 50 years, the obsession for combating inflation has dominated OECD economies. In the …