China’s rapid emergence as a financial super power may challenge the US less than some opponents of President Barack Obama and a few independent analysts would have us believe. In fact, Beijing’s financial ascendancy is a paper tiger and its wider economy could become a responsible friend.
It is true that the financial power driving China is spectacular. With foreign exchange reserves of more than $2.4 trillion at the end of 2009, the People’s Bank of China is richer than any other central bank, including the US by far. This is likely to grow by another $300 billion this year, not counting the reserves held by the major (state-owned) commercial banks. Those undisclosed reserves may be larger.
This power is turning China into a juggernaut scouring Asia, Africa and Latin America for natural resources and political influence. It is also scouting the US and Europe for technology and valuable companies with special capabilities. These investments abroad are politically motivated and can be predatory since China’s money is not privately owned or subject to the normal rules of profit-driven competition.
This raises hackles and alarm among many American and European politicians and policy analysts. However, despite its dour nationalism and mercantilism, China’s financial armory is trapped in a dollar-dominated world stewarded by the US. Whatever its political differences with Washington, enough debt denominated in euros, sterling, Swiss francs or yen is just not available to absorb Beijing’s huge wealth safely without destabilizing the host countries’ economies. Therefore, most of it must remain in dollars.
In effect, the vast US economy will continue to have a whip hand over dynamic China for many years because it is far stronger and fundamentally more stable. In contrast, existential troubles specific to it are buffeting China, including huge social inequalities between the urban rich and rural poor and violent internal rebellions as in Tibet and the Uighur territories. These sit upon a repressive regime controlled by ideologically-motivated leaders fearful of losing power in a popular democratic vote.
Beijing also faces a distrustful international community apprehensive of what prickly Chinese pride and nationalism might do to the world. Negatively affecting the economies where it invests will cause losses for China regardless of whether it bought safe government bonds, acquired fine companies or invested in blue chip equity. If Beijing wants to stimulate economic growth, jobs and consumer demand in China (partly to prop up its regime), it will have to help the entire world economy to grow. That cannot be achieved as a pillager.
For over 30 years since Deng Xiaoping’s economic reforms, China’s exporters have prevailed in key world markets using cheap labor and inexpensive capital (provided by state-owned banks). Exports are subsidized heavily through low cost loans to exporters and foreign importers are subsidized through artificially depressed exchange rates. Internal rules are used to prevent Chinese savers from investing abroad and to force them to invest at home. This is predatory and mercantilist.
But China’s financial power, now weighing heavily on the world, stands on fragile pillars of excessive investment in over-heated domestic sectors and weak consumer demand. Almost all savings are funneled as capital into Chinese companies, neglecting the consumer spending required for economic growth and job creation. One result is strong inflationary pressures amid an already unsafe environment comprising various bubbles waiting to burst, including a perilous commercial real estate bubble.
Recently, Beijing has given signs of recognizing the dangers. It is cooperating more with the US and Europe to prevent upheavals on financial markets that might be caused by Chinese shortsightedness. It is trying to stimulate domestic demand through macroeconomic and fiscal measures while opening more generously to imports. It is turning away slightly from its earlier obsession with exporting more whatever the costs of its hidden subsidies and exchange rate manipulations.
Beijing has even signed currency swap deals with a few countries and is allowing some companies in Shanghai and South China to pay for imports in renminbi. But full convertibility of the renminbi is still distant because that might cause a strong outflow of capital to investments abroad. Beijing fears that investors will flee China’s arbitrary regulations and precarious legal redress for safety in companies operating in countries with more predictable and transparent regulatory systems.
China has always been a touchy nation unable to resolve the conflict between its feelings of inferiority in the face of Western power and its sense of entitlement to deference from foreigners as a great civilization.
Currently, it is more open to foreign influences than ever and more enmeshed financially with the West than ever. This gives Obama a rare opportunity to bring China’s huge economy into beneficial relationships with the US and the world while pacifying its historical grievances against the West.