Friday, March 13, 2009

Forget Chinindia! It's Chimerica to the Rescue!

Forget Chinindia, G7, or even G20. Consensus is growing that it's G2, the governments of China and the United States, that will lead the world out of the current global economic crisis.

The combined behemoth of China and America has been labeled by Harvard business school professor Niall Ferguson as "Chimerica". Ferguson believes "we are living through a challenge to a phenomenon Moritz Schularick and I christened “Chimerica.” In this view, the most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years."

The Group of 20 finance ministers (G2) gathering this weekend in England are of various minds but the U.S. and Chinese governments agree that the top priority should be to pump more money into the world economy to boost global demand.

When ranked by their purchasing power, the United States and China are the largest economies in the world, and the ties between them arguably make theirs the single most important economic relationship in the world today. For both governments, the global financial crisis has served to remind them of their deep interdependence.

For at least a decade or more, Chinese savers have funded about $2.0 trillion dollar spending spree by American government, businesses and consumers. While American savings have declined from above 5 percent of the GDP in the mid 1990s to virtually zero by 2005, the Chinese savings rate has surged from below 30 percent to nearly 45 percent of its GDP. This divergence in saving patterns has fueled a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money at lower interest rates than would otherwise have been the case. At the same time, low-cost Chinese labor helped hold down inflation.

Other foreign lenders of over $100b to US treasury include Japan, Oil-rich Persian Gulf nations, UK, Brazil and Russia. By comparison, India owns about $30b of US bonds.

In addition to the three trillion dollar investment in US treasuries, Asian, European and Middle Eastern nations have poured hundreds of billions of dollars into US stocks and bonds which have suffered deep losses and caused great disappointment during the recent Wall Street collapse. The losses have been so traumatic that it will be very hard to restore the confidence of these overseas investors in US financial markets for a long time.

The Chinese are now expressing concerns about the safety of the funds they have provided to the United States. "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets." The U.S. is just as concerned about the potential consequences of its massive dependence on Chinese savings and possible use of the "nuclear option" by the Chinese.

While both the U.S. and China are genuinely concerned about such strong interdependence, neither is in a position right now to do much about it in the middle of a major global economic crisis. China invests in U.S. dollars for lack of a safer alternative. It could spend more at home, boosting imports and cutting back more on exports. But in a time of shrinking employment in China, such a move would be politically risky.

Both nations are taking their responsibilities seriously to rescue each other and the world from the worsening world economy. According to the International Monetary Fund, the U.S. and Chinese governments are devoting a larger share of their economies to stimulus programs than any of the other major G-20 countries, and they are together urging other governments to follow their example.

Related Links:

Is This the End of American Capitalism?

US, China United on Approach to Economy

What Chimerica Hath Wrought?

US Federal Budget and National Debt

China's "Nuclear Option"

The Formula That Wrecked World Economy

List of Foreign Lenders to America


Anonymous said...

At last some good news for Pakistanis like!

Riaz Haq said...


Seriously, it's good news for India, Pakistan, US, China and the rest of the world facing what the British finance minister describes as the "worst economy in sixty years". The US is the most important export market for goods and services from India, Pakistan, China as well as many other countries. So it's important for the US economy to recover quickly. US and China are clearly the twin engines of growth capable of pulling us all out of the mess we are currently in.

Anonymous said...

This defeated mindset, unvarnished hatred, and never ending suspicion displayed by Naveen is the weirdest phenomena for many of us. Its not unique to him or or to a few middle class Indians but its kind of omnipresent among Indians. I would not say that this condition is a morale booster for me, in fact I am more worried that if Indians feel so insecure when things are going so well for them then what would they do when they face a speed wobble? Or may be there is something behind all this hype that they know that we do not know! What happened to the Barak's CTO?

Anonymous said...

This defeated mindset, unvarnished hatred, and never ending suspicion displayed by Naveen is the weirdest phenomena for many of us.

No doubt. True to the "cunning Hindu bania" idea that's so prevalent in Pakistan. Some of the moral righteousness displayed on these comments border on the absurd. Like all Pakistanis are doodh mein dhule hue :-) . Take a break from the righteous indignation and go back to chop-chop - before there's not much left to chop-chop for.

Riaz Haq said...


It is really sad to see how quickly serious discussion of any topic turns into an ugly confrontation regarding issues that are not even relevant to the post. It does show a total lack of maturity if not "unvarnished hatred" and "never ending suspicion" by some commentators.

Anonymous said...

i'm an indian and it came as a relief to know that India only owns $30 billion of U.S T-bills. My father is a bank manager and always carps about how the govt has eased the lending norms for student loans in India. I think it is a socially responsible move to lend money to our own young people, even if 50% default on their student loans than to use that money to encourage American consumerism.

As much as we would like to denigrate our politicians, i would give them an above averge grade for social responsibility and not deserting Nehru's vision of non-alignment completely and doing a rather good job of steering the ship of state through these troubling economic times. It is better to stay decoupled sometimes.

Riaz Haq said...


You say, "i'm an indian and it came as a relief to know that India only owns $30 billion of U.S T-bills. "

I agree with you that it doesn't make sense for India to lend $30b to the US when its own infrastructure projects could easily use far more than that and create more jobs for its people.

Anonymous said...

Riaz, but compared to $2 trillion, you agree that $30 billion is a drop in the bucket. Also it is a necessary evil, given the reserve status of the U.S dollar. But, to me the most important sovereign function of any country, India or Pak is to protect the value of their currency. In early 2008 A dollar was worth Re.40 and today it is Re.51. I'm sure the situation in Pak is much worse.
I think the politicians in India understand that it is paramount to avoid an east-asian type crisis. Eventhough we liberalised in 1991, we didn't encourage too much hot money to flow in. Otherwise the situation would have been much worse. Perhaps one of the reasons the Obama administration has been cool towards India. We are not a big stake holder, and not in the same boat as the U.S and Chinese. Their economic well-being is more closely linked to one another.

Riaz Haq said...

Here's a Forbes piece by Stephen Harner on US-Japan vs China on disputed islands:

Former students of Asian politics and international relations of a certain age (my age, or a bit older), would in college or graduate school have heard of, if not carefully read, China Crosses the Yalu: The Decision to Enter the Korean War, by Allen S. Whiting (1960). This was a seminal study of formal or–mainly–informal signals sent by China in 1950 warning with increasing clarity and vehemence the officially U.N. (but overwhelmingly U.S.) forces under command of Douglas MacArthur, then beating back North Korea invaders and advancing up the Korea peninsula, that China was prepared to and would intervene on behalf of North Korea if its territory or vital interests were threatened.

In the event, on October 25,1950, 25 days after U.N. forces had crossed the 38th parallel, 200,000 Chinese People’s Liberation Army (redesignated by Mao Zedong the People’s Volunteer Army) soldiers, having secretly crossed the Yalu River on October 19, attacked U.N. forces, beginning an engagement that would vastly increase casualties on both sides, but especially for the PLA. Whiting’s book sought to discern at what point China’s in many cases subtle and indirect warnings might have been heeded or responded so that intervention might have been avoided.

I have been reminded of China Crosses the Yalu as I have worked through the new book on the Senkaku/Diaoyu island crisis by Yabuki Susumu (矢吹晋), professor emeritus of Yokohama City University, one of Japan’s most eminent China scholars. The book (written in Japanese) is entitled:「尖閣問題の核心 」(The Core of the Senkaku Issue), and bears a subtitle:「日中関係はどうなる」 (What is to Become of Japan-China Relations). I believe that the book is the fairest and most objective, as well as the most thorough, exposition of the positions of both Japan and China, and–critically–the U.S., on the Senkaku/Diaoyu islands dispute.

At the risk of oversimplifying, I think I can summarize Professor Yabuki’s analysis and conclusions as follows:

1. The Japanese position on the Senkaku/Diaoyu issue is indefensible on several counts, including most fundamentally Japan’s unconditional acceptance of the terms of the Potsdam Declaration (which required the return of all territories “stolen” from China).

2. The Meiji government’s annexation of the Ryuku Islands (theretofore an autonomous kingdom) in January 1885, within which the Senkaku/Diaoyu islands were identified, followed three months later by the Qing Dynasty’s surrender of Taiwan and the Pescadores to Japan in the Treaty of Shimonoseki (ending the Sino-Japanese War) are both mooted by the terms of Potsdam. The islands were and are clearly part of Taiwan, which in addition has the most legitimate claim to continuous use/occupation.

3. The Japanese position that Senkaku/Diaoyu is part of Japanese territory because it was awarded to Japan by the U.S. in the Okinawa Reversion agreement of 1971 is similarly contrary to fact. The U.S. awarded to Japan only administrative authority over the islands, not sovereignty. Sovereignty was specifically not transferred. The U.S. continued to maintain was undetermined between the three claimants and would only be determined through discussion and agreement. (As I noted in the last post, the Obama administration–in a monumental blunder–effectively changed this policy by failing to object to and stop Japanese “nationalization.”)....

Hopewins said...

^^RH: "While American savings have declined from above 5 percent of the GDP in the mid 1990s to virtually zero by 2005, the Chinese savings rate has surged from below 30 percent to nearly 45 percent of its GDP."

Domestic Savings rates:

If you were talking about Household Savings rates (as a subset of Domestic Savings rates), then perhaps you should have specified that:

Riaz Haq said...

HWJ: "If you were talking about Household Savings rates (as a subset of Domestic Savings rates), then perhaps you should have specified that.."

One can draw a conclusion from this data that industrialized nations with strong social safety nets have lower savings rates than less developed nations where people must save more of their incomes for the rainy day and fend for themselves.