As a result, the People's Bank of China became the first major central bank to issue a virtual currency. A broader roll-out is expected for the Winter Olympics in Beijing in February 2022, which will give the digital yuan international exposure.
This has alarmed the Biden administration. Officials at the Treasury Department, the State Department, the Pentagon, and the National Security Council are frantically trying to comprehend the potential implications of a virtual yuan system. They are particularly eager to understand how it would be distributed, and whether it could be used to bypass Washington's international sanctions as applied to Iran. What distresses some American officials and experts is the notion that someday China's virtual yuan could replace the U.S. dollar as the world's dominant reserve currency.
At the Federal Reserve, Chairman Jerome Powell insisted that the central bank was involved in a large-scale research and development project on a possible future digital dollar, though pointing out that such a project could only be launched via a law that would have to be passed by a deeply divided Congress. In short, irrespective of the future of China's virtual currency, a digital dollar is not likely, not in the near future anyway.
Building Infrastructure (or Not)
As for recent economic history, even a cursory look at the performances of the United States and China in combating the 2008 financial meltdown tells a striking tale.
China made an indelible mark in meeting that financial challenge. Its government sharply increased its infrastructure spending, resulting in higher imports that helped counter flagging global demand. While this move increased Beijing's debt, it also helped build a foundation to further transform the country's economy into a productivity-led growth model. A decade after that great recession, according to the World Economic Forum's Global Competitiveness Report, China's infrastructure ranking jumped from 66th place to 36th place out of 152 countries.
Although infrastructure building on a large scale requires significant upfront investment, it's guaranteed to yield productivity gains in the long run. Time and cost savings for commuters, improved market access, healthier competition, increased exchange of ideas, and enlarged innovation capacity, all aided by modern infrastructure, are a springboard for economic development.
During the decade following the 2008 crisis, the number of Chinese cities with metro services jumped from 10 to 34 and 1.1 million kilometers of highways were built, raising the total to 4.8 million kilometers. The length of its high-speed rail system shot up by 52,000 kilometers to 132,000 kilometers. Introduced on the eve of the 2008 Olympics in Beijing, it's now by far the world's longest system, accounting for two-thirds of the globe's high-speed rail. Its advances in information-and computer-technology were equally impressive. On average, mobile-phone subscriptions came to exceed one per person about the same as in the United States.
High-speed rail (of which the United States has none) reduces journey times, while linking dense urban areas with less crowded cities. In doing so, it allows for a more balanced distribution of labor and business development without sacrificing the benefits of an increasingly urbanized economy. Economies of scale in turn mean that productivity rises as rail usage increases.
Little wonder, then, that President Barack Obama and his team promoted the $787 billion American Recovery and Reinvestment Act of 2009 as an infrastructure-building program in response to the 2008 economic crisis. In reality, however, only $80 billion, a tenth of the money Congress sanctioned, would be devoted to actual infrastructure. Of that, about a third was spent on roads and bridges, improving about 67,600 kilometers of roads and 2,700 bridges. The program also included investment in modern infrastructure like smart grids and broadband development.
In 2010, Obama announced what was to be the "largest investment in infrastructure since the Interstate Highway System," the creation of a high-speed rail network that would rival China's. More than a decade later, the only visible progress is a much-delayed and still incomplete 275-kilometer Central Valley California line from Bakersfield to Merced. And in the Trump years, when essentially no government money went into such projects, "infrastructure week" became a standing joke. President Biden seems determined to rectify this, but how successful he'll be with his $2 trillion infrastructure proposal in the face of a rigidly divided Congress remains to be seen.
For its part, the Chinese government combined its program of rapid infrastructure development with upgrading of the labor force. It did so by implementing an educational system that stressed science, technology, engineering, and math, known as STEM. By achieving higher productivity in this way, the government planned to compensate for a projected shrinkage in its work force.
To promote STEM, the government issued guidelines in 2016 to create a national development strategy aimed at advancing China to the forefront of innovative countries by 2030. In February 2017, the Ministry of Education officially added STEM education to the primary-school curriculum. Since then, encouraged by official policies, schools in both the public and private sectors have implemented such programs.
In 2019, the government allocated 100% of its research funding to top universities to the ones that concentrated on STEM disciplines. By comparison, South Korea allocated 62% of such funding that way. By contrast, U.S. universities ranked in the top 100 maintained a greater balance in funding among STEM fields, humanities, and social sciences.
In October 2019, three of China's biggest mobile-phone carriers launched advanced 5G services, giving it the world's largest 5G mobile network. A year later, the Wall Street Journal reported that China had more 5G subscribers than the U.S., not just in total but per capita.
Given the ubiquity of smartphones, the news that America seemed to be losing the tech race to China was widely noted. Mostly ignored, however, was the extent to which the U.S. had become vulnerable to Chinese pressure in international trade.
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