Financial marriage between China and the U.S. on the rocks

Discussion in 'Economics' started by SouthAmerica, Aug 5, 2009.

  1. .

    August 6, 2009

    SouthAmerica: This marriage might end up in a nasty divorce.


    “Financial marriage between China and the US on the rocks”

    Saver Beijing contemplates a divorce from big-spender Washington as it looks for new ways to have its economic needs met

    Bangkok Post (Thailand)
    Published: August 1, 2009

    Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. His most recent book is The Ascent of Money: A Financial History of the World. He spoke with Global Viewpoint Network editor Nathan Gardels as the US and China sat down this week for a "strategic dialogue" in Washington - the "G-2" meeting.

    Nathan Gardels: Despite all the other issues on his plate, President Barack Obama's overarching challenge over the course of his administration is correcting the imbalance with China. More than anything else, as you have noted, it has been China's strategy of dollar-reserve accumulation that financed America's debt habit. Chinese savings were a key reason US long-term interest rates stayed low and the borrowing binge kept going. Now that the age of leverage is over, what is the key to maintaining the partnership between the big saver and the big spender?

    Niall Ferguson: My friend Moritz Schularick and I came up with the idea of "Chimerica" back at the end of 2006. We were trying to explain the global financial boom, with its correlated upward movement of virtually every asset class.

    We decided the answer was that China and America had effectively fused to become a single economy: Chimerica. The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.

    As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. So they intervened consistently in currency markets, and as a result have now got international reserves totalling $2.1 trillion (70 trillion baht). Around 70% of these are in dollar-denominated securities, and a large proportion of these are in US government bonds.

    The unintended effect of this was to help finance the US current account deficit at very low interest rates. Without that, it's hard to believe that US financial markets would have bubbled the way they did in the period 2002 to 2007.

    The big question is now whether or not Chimerica is a marriage on the rocks. The financial crisis has brought the age of leverage to an end in the sense that America's highly indebted consumers really cannot borrow any more. The US savings rate is soaring upwards, and US imports from China have declined significantly. The Chinese trade figures tell the same story: Exports have collapsed.

    Of course, that doesn't mean the Chinese are going to stop buying dollars. They daren't allow their currency to appreciate when so many jobs in the export sector are under threat. But it does mean that they are questioning the "Chimerica" strategy.

    I would say this is a bit like one of those marriages between a saver and a spender. It can work for a certain period of time, but then the saver gets disillusioned with the spendthrift spouse. Every time the Chinese complain about American profligacy, it reminds me of one of those domestic tiffs in which the saver says to the spender: "You maxed out on the credit cards, but now I am going to cut them up." Except that it's a threat the Chinese aren't quite ready to carry out.

    Gardels: The Obama administration is seeking to borrow billions from the Chinese to finance its stimulus and bailout packages to get the economy going again. What if the Chinese don't buy those Treasuries? Why wouldn't they?

    Ferguson: Let's look at the numbers. China's holdings of US Treasuries rose to $801.5 billion in May, an increase of 5% from $763.5 billion in April. Call it $40 billion a month. And let's just imagine the Chinese do that every month through this fiscal year. That would be a credit line to the US government of $480 billion. Considering the total deficit is forecast to be around $2 trillion, that means the Chinese could conceivably finance less than a quarter of total federal government borrowing (whereas a few years ago they were financing virtually the whole deficit).

    The trouble is that the Chinese clearly feel they have enough US government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy plus the Federal Reserve's policy of quantitative easing (in layman's terms, printing money) are going to cause one or both of two things to happen: The price of US bonds could fall and/or the purchasing power of the dollar could fall.

    Either way the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk.

    Gardels: What is China's alternative if it seeks a divorce from Chimerica?

    Ferguson: I'd call it the empire or superpower option. Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (their gross domestic product could equal that of the US by 2030) to buy them global power in their own right.

    In some ways they've already begun doing this. Their naval strategy implies a challenge to US hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial to me. And now the official line from [Prime Minister] Wen Jiabao is "hasten the implementation of our 'going out' strategy and combine the utilisation of foreign exchange reserves with the 'going out' of our enterprises".

    That sounds like the start of a Chinese campaign to buy a lot of foreign assets. But at the same time, crucially, they need to have their own domestic consumers step up to take the place of over-leveraged Americans. China's economy is above all a manufacturing concern. If no one is going to the shopping malls, their companies are just building their inventories. So a post-Chimerican China needs to be not only an empire but also a consumer society. That means getting ordinary Chinese households to save less and spend more.

    Gardels: China seems to have embraced the Special Drawing Rights idea of a basket of currencies to replace the dollar as the reserve currency. Isn't this like "serving papers" - it shows China's intention of breaking up Chimerica over the longer term? Or, are they just hedging their bets?

    Ferguson: Yes, I think they are "serving papers", or at least threatening to do so. I don't myself believe that it's practical to turn International Monetary Fund Special Drawing Rights into a new world currency. They're purely an accounting device, not proper money. But I do see the euro and the yen playing a bigger role in Chinese reserves.

    I also see a day within the next five to 10 years when the Chinese will feel ready to remove their capital controls and allow their own currency, the renminbi, to develop as an international currency. At that point the Chimerican marriage really will be over. And, after all, that's what Moritz Schularick and I always said would happen. We called it "Chimerica" because we thought that such an unbalanced relationship would eventually prove to be a chimera.

    Gardels: What are the global strategic implications of such a divorce?

    Ferguson: Imagine a new Cold War but one in which the two superpowers are economically the same size, which was never true in the old Cold War because the USSR was always a lot poorer than the USA.

    Or, if you prefer an older analogy, imagine a rerun of the Anglo-German antagonism of the early 1900s, with America in the role of Britain and China in the role of imperial Germany. This is a better analogy because it captures the fact that a high level of economic integration does not necessarily prevent the growth of strategic rivalry and ultimately conflict.

    We are a long way from outright warfare, of course. These things build quite slowly. But the geopolitical tectonic plates are moving, and moving fast. The end of Chimerica is causing India and the United States to become more closely aligned. It's creating an opportunity for Moscow to forge closer links to Beijing.

  2. I little point that isn't mentionned. A lot of chineses are mtv kids... they want to live in the Us, watch basket ball and dream about the big mansion in Cali^^

    If the Us restaure the hope of freedom there is no worry... However no one seems ready to pay the price of the dreams.

    "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."
    Benjamin Franklin
  3. Rather presumptuous, don't you think?

  4. Modern version... replace "safety" with "Obama-promised free ice cream"...

  5. .........................................................


    US needs another "Franklin"....

    At the has an "insidious red rash"....

    You know....just another F'in politiCONic lawyer....

    Far far worse than the typical "ambulance chaser"....
  6. the truth that the rich Chinese living along the east coast dont want any changes. they dont want democracy, they are so well off now that any change would only be for the worse. after all in democracy every vote counts the same and they are in minority compared to poor peasants in the west.
  7. Kind of sounds like us. How many millionaires voted for Obama and his campaign for change though?

    No matter what people say, if you live in America, you are better off than most of the world even if you are poor, yet the people still wanted "change". Hope they are happy with what is about to happen now.
  8. The promise of "free ice cream" will win any election except the one where MORE free ice cream is promised.
  9. This is true. I heard/read a quote a while back, can't remember from where, but the guy brought up a great point. The USA is the only country where the poor are OBESE rather than SKINNY. That should tell you something about the quality of life in general as compared with the rest of the world.
  10. .

    August 7, 2009

    SouthAmerica: I wonder if the United States government has asked permission from the Chinese government to follow up with this plan, since China is the country that would be financing another U.S. misadventure - this time in South America.

    Before you know the U.S. will turn Colombia into another Vietnam.

    Why should China finance this new American misadventure into South America considering that South America is becoming a major trading partner of China?

    South Americans don’t want any American military bases in South America.

    This is why I have been saying for a long time that Brazil should wake up, and Brazil needs to develop nuclear weapons to be able to defend itself from any other country that decides to mess around with Brazil.

    Brazil should also enter this arms race in South America, and it should start developing nuclear weapons ASAP.


    “Uproar over plans for US bases in Colombia”
    By: TOM HENNIGAN in São Paulo
    The Irish Times (Ireland)
    Friday, August 7, 2009

    A PLAN by Colombia to allow the US up to seven military bases on its territory has caused uproar in South America, prompting Colombia’s president, Álvaro Uribe, to undertake a tour through the region to try and reassure neighbours anxious about the move.

    Colombian and US negotiators are close to finalising a deal that would give the US three air bases, two military bases, and two naval bases, one each on Colombia’s Atlantic and Pacific coasts.

    Colombian officials say the bases would count on a light US military presence that would aid them in their operations against the country’s drug traffickers.

    Colombia is the world’s biggest producer of cocaine, which has fuelled a decades-long insurgency by left-wing guerrillas.

    Leading the opposition to the deal is Venezuela’s left-wing president Hugo Chávez. “They are surrounding Venezuela with military bases,” he said in a televised speech Wednesday.

    He said the deal would turn Colombia “into an imperialist base of operations from which Venezuelan sovereignty is threatened”. He announced a full review of relations with its neighbour and said he would buy “several battalions of tanks” from Russia.

    Last week Chávez recalled his country’s ambassador in Bogotá after the government there accused Venezuela of supplying arms to the Farc, Colombia’s largest guerrilla group. Venezuela denied the charge.

    Even Chile and Brazil, who both have good relations with Colombia and the US, have expressed deep unease about the proposed deal.

    After stops in Chile, Paraguay, Argentina and Uruguay, Mr Uribe was to meet Brazil’s President Lula yesterday in a bid to address Brazilian concerns over the bases.

    Brazil’s foreign minister Celso Amorim said at the weekend the country was worried about the proposal as it provided for “a strong military presence whose objective and capacity go much further than Colombia’s internal needs”.

    Colombia, the US’s closest ally in the region, has received more than $6 billion in aid from the US since 2000 as part of the anti-drug programme. It has used the cash to beef up its military, which has scored important military victories against the Farc in recent years. But while cocaine production has dropped in Colombia, a recent UN report said traffickers had made up the shortfall by expanding production in neighbouring Peru and Bolivia.

    While ostensibly part of Washington’s “war on drugs”, the two naval bases in particular will also give the US a renewed military presence close to the Panama canal, the vital trade artery from which the US military was forced to withdraw in 1999, following the non-renewal of its lease by the Panamanian government.

    The deal will also come as the US is winding down its only military base on the continent – Manta in Ecuador. The country’s left-wing president, Rafael Correa, refused to renew its lease and is one of the most strident opponents of Colombia’s plan to provide the US with facilities across the border.

    #10     Aug 7, 2009