The current turmoil in the US will make it harder to bridge the cultural divide between China and the West – and will bolster efforts to internationalize use of the renminbi.
As the largest foreign buyer of US government securities, China can only fret as the value of its holdings is held hostage to a fractured political process in Washington. But while the longer-term implications of these developments are likely to hurt the United States’ democracy and human rights agenda as far as China is concerned, ironically, they will help its international financial situation.
On the political front, China’s leadership will quietly welcome comparisons with the relative ease with which its system is able to move on collective action within a tightly-controlled political process. This will reinforce self-serving messages as the Communist Party celebrates its 90th anniversary, especially as the party has been under considerable pressure lately to redefine itself, as its society is no longer isolated, rural, and poor, but is now globally integrated, urban, and fixated on wealth accumulation.
And, while China struggles to achieve a ‘soft landing’ from its economic stimulus programme, the fiscal problems in the United States will be used as a reminder to its restless constituents that democracy doesn’t guarantee that the right compromises will evolve to support the common good. Nor will the problems in Europe in forging a collective sharing of looming default burdens, or the continued decline of the Japanese economy, strengthen the case for liberalizing China’s political system. Indeed, all this will make it even harder to bridge the cultural divide that separates China from the West over the way they view global issues.
But on the economic front, recent developments are likely to push China’s leadership to move more aggressively to reshape the policies relating to the country’s exchange rate and trade regime that have exacerbated tensions with the United States over the past decade. The United States’ fiscal woes will reinforce the view that it makes little sense for China to continue generating trade surpluses that must then be used to buy US securities, which may only diminish in value over time. Any lingering notion that mercantilist tendencies still drive Chinese policymakers should now be discarded.
Some estimates suggest that with unchanged external policies, China’s foreign exchange holdings could increase from the current $3.2 trillion to $5 trillion by 2015. But with the prospects of all three major reserve currencies under a cloud, parking such amounts in foreign securities is unappealing, making it unlikely that these levels will materialize.
China’s overseas direct investments—which amounted to less than $5 billion seven to eight years ago, but now run around $60 billion annually—are another option for channelling these surpluses. But sensitivities among OECD countries make it unlikely that China can find enough attractive opportunities in the resource- and technology-based industries to make this a serious alternative. While growth in overseas investments will be brisk in the coming years, this won’t satisfy China’s desire to diversify its holdings, and returns would still be vulnerable to exchange rate fluctuations.
Photo Credit: White House
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ozivan
@a_canadian_observer. You said in reply to Xenri :Just look at the amount of people migrating to the US (and any other western nation), then look at the number of US citizens migrating to China.
It is often said : Don’t ask what you wish for.
Chinese migration is going to be a big and worrisome issue in the future for the Western countries, particularly for US, Canada, New Zealand & Australia. There is already an ongoing Chinese migratory movement, partly planned and organised, though still largely driven by private reasons, of Chinese migration, whether by legal or illegal means, numbering 2 million a year. Once the State/CCP clandestinely gets involved in encouraging emigration, you could see the numbers grow to 5-6 million per annum.
Sit back and think…I have sort of visualised, some 7-8 years ago, this could happen one day …that a new form of REVERSE COLONISATION will happen.
ozivan
A new form of colonisation described by me as ” REVERSE COLONISATION ” may happen.
a_canadian_observer
@ozivan: “It is often said : Don’t ask what you wish for. ”
That’s not my point. My point is, just look at the flow and figure out which is a better place.
John Chan
We have two economy systems in the world; the West dominated free market economy, and China’s controlled capitalist economy. The author is encouraging two systems to be converged into the free market economy. I think his logic is flawed and dangerous to the world.
Any smart investor knows to spread risk, and never put all eggs in one basket. Now the free market gets trouble, controlled capitalist economy keeps the world going. So it could be vice versa.
If the world has only one economy system, when the system get into trouble there is no easy way to relief the problem, that’s what has happened prior to WWI and WWII.
The author lets the technicalities clouded the fundamentals. For the peace and prosperity of world, we should pray the Chinese economy system can be preserved including its controlled RMB.
ozivan
China is often described as the : Rich Poor Country
davida
i dont know who is jealous of who. but if u asked us goverment,they would rather trade their economic position with that of china’s. and i doubt if u understand the article from the perspective of economic science other than self-promoted sci-fi writers. the reality is, on contrary, easier for chinese to be more reckless spenders by appreciating chinese currency more rapidly through dumping of us dollars and treasury holdings, than make americans more thrifty with all so called ” austerity measures”.
just recently during my trips in china, i found to my surprise that a lot of commodities are more expensive than, we say, in australia, one of most economically stable western nations. those items, i kid u not, are toys, clothes and electronics, some of which are actually imports. so, i was wondering if china is a country accoused of flooding western nations with their sweatshop, low quality, copy cat stuff. shocking, isnt it?
if chinese can afford the price or, we say,”priveledge”, usually reserved for americans, brits, or japs at the present exchange rate, there is no way that china would still bleed themselves supplying wests with their underpriced exports for those worthless stacks of toilet paper moneys whose values are subjet to soap opera namesake of QE series and sensentional political dramas.
i have no doubt that the wests will continue broadcasting the gap issues, political sentiments of certain chinese constituents and historical dependence of chinese economy on us and EU. true as it may, unfortunately, this time around, chinese got more cards up their sleeves than us and their lapdogs that lately as most guys have observed, more frequently resort to bluffing and sheer shameless intimadation. ” china threat” and ” underpriced renminbi” are used to justify the us and their allies predicaments. so, what hell, if i was president of ccp, i would to urge us to serve another round of easing programme and europe to drop that integrated currency union, so everyone got hurt. the question then would be who is more vulnerable and who got higher pain threshold.
Leonard R.
China buys T-Bills out of weakness – not strength.
The Dollar is kept artificially high on world markets.
The price of US goods are expensive because of this.
And this causes jobs to leave the US and go to China.
So what happens when China stops buying T-Bills?
It’s not hard to figure out. That’s why I predict China
will continue to buy T-Bills.
The US should put that Chinese money to good use.
It should invest in new fast attack submarines, improved
cyber-warfare & anti-sat weapons.
That’s the wise approach.
Johnny Monroe
Do you not understand, that obsession with weapons and wars are what that had sank the US economy?
We American would still have been the pre-eminent economy in the world, if we have not bleeds those trillions of dollars building weapons that cost a billion a piece and fighting wars that make no sense.
It would have cost us much, much less, to send small team of highly trained special forces after the islamist insurgents then the whole US military.
John Chan
Chinese leadership has two purposes, job creation and fight inflation. The demise of USA and EU work against those two purposes. Giving money to USA and EU is not a sustainable way or a solution good for everybody. USA, EU and China must work together to get problems solved.
xenri
the fact are chinese envy the americans.. some even said china is better than u.s.a thats so naive to say.. you know the truth that even with your economic and military rise your still a 3rd world country,
a_canadian_observer
@xenri: Ditto! It’s not difficult to figure out. Just look at the amount of people migrating to the US (and any other western nation), then look at the number of US citizens migrating to china.
Sinodefender
Then,some migrate back…U.S. has the best colleges in my opinion,and one can make more money compared to other countries but living conditions are debatable. China has a better track record,cleansing natives and taking over lands or enslaving others. China invented things that we take for granted ditto with U.S.
John Chan
@xenri:
You don’t discuss articles; all you do is bad mouthing China based on your ill imagination, and baseless allegation. Japan without China, its economy will sink further more. Japanese should be grateful that China keeps it on the lifeline.
Japanese should know the Buddhism fundamentals, cause and consequence. Japanese should ask why Mother Nature was angry at Japan, is it because Japanese ill thoughts and bad deeds.
ozivan
@xenri. If you’re raising your view as an observation, then it is alright, but if it’s meant to be sneering, then it is bad.
Your tone and sentence construction is sneering, you’ll get harsh replies in return.