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.
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