WCA March 2009

Statue of Liberty Image from BigStockPhoto.com Photographer: Marty

Would the breakup of ‘Chimerica’ mean the end of globalisation? Even as China rejects the notion of itself as America’s rescuer in the current economic crisis, there is another designation that Beijing will find harder to shake off: America’s banker. In September, China surpassed Japan to become the largest foreign creditor of the US. In fact, it is highly likely that, holding 10% of all US public debt, the government of the People’s Republic of China is Washington’s largest creditor – foreign or domestic. Writing in PostGlobal, an experiment in collaborative journalism hosted by the Washington Post, co-moderator Fareed Zakaria observed that one of the more crucial posts in the administration of President Barack Obama will be that of US ambassador in Beijing. This official, together with the host of others who will be managing this relationship, will need to make sure that China sees its interests as aligned with America’s. Or else, Mr Zakaria warned, “Things could get very, very ugly.” (“China’s Lifeline to the US,” 23 rd November) For a time, at least, China did see its interests as consonant with those of the US. Citing “The Ascent of Money,” by Niall Ferguson, Mr Zakaria notes the Harvard University professor’s concept of a new nation – Chimerica – which came to the birth after the cold war and now accounts for a tenth of the world’s land surface, a quarter of its population, and fully half of global economic growth over the past eight years. This was a harmonious marriage, with the Easterners getting growth; the Westerners, low inflation and low interest rates. The division of responsibilities was likewise in balance. “The East Chimericans did the saving,” wrote Mr Ferguson. “The West Chimericans did the spending.” To ring the changes in the situation, Mr Zakaria called on another professor (Columbia University), Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, who noted the popular notion that China and America are equally dependent on each other. “But that’s no longer true,” said Mr Stiglitz. “China has two ways to keep its economy growing. One way is to finance the American consumer. Another way is to finance its own citizens, who are increasingly able to consume in large enough quantities to stimulate economic growth in China. They have options – we don’t. There isn’t really any other country that could finance the American deficit.” In effect, Mr Zakaria of PostGlobal wrote, the US is looking to China to finance simultaneously the two largest fiscal expansions in human history – “theirs and ours.” Washington “desperately” needs Beijing to keep buying American bonds so that the US government can run up a deficit and launch its own fiscal stimulus. China will probably try to accommodate the US because it is in the Chinese interest to jump-start the American economy. But, he said, “Naturally their priority is likely to be their own growth.” Mr Ferguson, too, believes that China will try to keep ❖ ❖ American consumption going, but with the same caveat

The American economic crisis and China

To the chagrin of the US, a wary China withdraws its attention to itself If the United States thinks China’s $1.9 trillion in foreign exchange reserves offers a way out of its own financial troubles, the US would be wise to think again. On 3 rd December the chairman of China’s sovereign wealth fund announced that China would not be making any further investments in Western financial institutions for the time being. Nor, said Lou Jiwei, the chairman and chief executive of China Investment Corp, should the world look to his country for salvation by economic means. There is no mystery as to how Mr Lou came by his jaundiced view of Western fiscal acumen. State-run Chinese institutions have taken heavy losses on their initial investments in, among others, the asset managers Blackstone Group and Morgan Stanley, of the US, and Barclays PLC, of Britain. Burnt once, China’s leaders are rather more than twice-shy. The Chinese are narrowing their focus, Mr Lou told fellow panellists on the second day of the Clinton Global Initiative conference, convened 1 st December in Hong Kong. He said, “Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have.” Mr Lou defended his position on the seldom-articulated grounds of his country’s insignificance. Reporting from the conference for the New York Times, Keith Bradsher traced Mr Lou’s reasoning that, while China has more people than any other country, economic output is still low: low enough that the Chinese economy is not yet large enough to have a big effect on the global economy. “China can only save herself because the scale of China is still rather small,” Mr Lou said. “If China can do a good job domestically, that is the best thing it can do for the world.” (“China to Shun West’s Finance Sector,” 4 th December) Accordingly, China Investment Corp, with $200 billion on hand that had been expected to head westward, has made its largest investments shoring up banks in China. Speculation that the fund presided over by Mr Lou might invest more money in Morgan Stanley evaporated when CIC invested instead in Mitsubishi UFJ Financial Group, of Japan. The world beyond the financial sector should also not rely too heavily on the bracing effect of big spending by China. The Times’ Mr Bradsher wrote, “While China has already announced plans for a stimulus plan of $586 billion, most of that money is earmarked for the construction of highways and railroads, categories in which China’s need for imports is fairly limited.” Laura Tyson, of the US, who served as chairwoman ❖ ❖ of the Council of Economic Advisors under President Clinton and who was on the panel with Mr Lou, said that the current crisis would give further impetus to Asia’s rise in economic importance vis-à-vis the West. “It’s going to accelerate the move of economic power to Asia,” Ms Tyson said. “It was under way before, but this will accelerate it.”

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Wire & Cable ASIA – March/April 2009