Foundation Course – Name
Introduction
The US-China international relations attract much attention of politicians and economists all over the world as the key influential and transformational factor on the global arena. Ferguson & Schularick (2007) adopted the term “Chimerica” to describe the peculiar relationship between US and China established during the decades. According to ancient Greek mythology, the Chimera was a monster with several heads, legs and arms representing a strong animal able to dominate the world and threaten its stability. Analyzing the world global crisis 2008-2009 and recession phenomenon Ferguson & Schularick (2007) referred the “Chimerica” concept to the emerging monster, which currently regulates up to 60% of global economic growth. While both countries are economically inseparable, the China vs USA are called as “Eastern/Western Chimericas”.
Ferguson (2009) builds his theoretical framework on opposition of East-West systems in the economic sphere. Thus, “eastern chimericans” are inclined to save up financial resources while “western chimericans” represent community preferring to waste them. It appears that East Chimerica manufactures and exports goods, accumulating resources whereas Western Chimerica maintain services, import goods and provide budget deficit issuing dollar nominated bonds purchased by Western chimericans. However, Ferguson (2009) underlined that Chimerica is not a “Chimera” despite its peculiar name.
A massive inflow of Chinese capital on American market proves the fact that China being the holder of an astronomical dollar bonds volume could provoke the collapse of the American Stock Exchange and the real estate market together with the significant increase of intra-group debt. During the Wall Street crisis resulting in bankruptcy of prominent investment banks like Lehman Brothers and Bear Sterns, The United States began gradually losing the status of the leading world financial system. At the same time, China’s position in the global economy was constantly increasing and growing stronger considering the cheap labor force, unlimited human resources and aggressive market strategy. This situation has provoked an inevitable monetary dispute between China and the United States (Schularick, 2010).
Chimerica Relationship Phenomenon
The peculiarities of Chinese-American relations today testify the fact that America departures from conventional paradigms, which considered China as a revisionist state challenging the global world order. According to Zoellick & Yifu (2009) China demonstrates a tremendous inclination to social mobility trying to get rid of “fragility syndrome”. Chinese government demands to recognize own social and economic status as equal to other members of “the power club”. However, the United States underlines the fact the Chinese active participation in various international organizations does not turn China into Washington’s peer competitor because the majority of such organizations act on a consensus basis where the majority of participant members are the United States trusted allies and satellites.
The most significant international response during the last decades was triggered by the creation of global management renewal mechanisms based on Chinese-American strategic partnership, expressing the level of countries’ interdependence and a fusion between two super powers. Ferguson (2009) assumes that such a symbiosis embody two critical characteristics of a modern global economy: accelerated globalization of manufacturing provoked by the broad availability of cheap labor force; and accumulation of foreign currency reserves, transferred to the US government via bonds promoting decrease of the discount rate all over the world. The so-called linkages representing macroeconomic factors complement the fusion between two countries in “Western vs Eastern Chimericas” relation (Table 1).
Eastern Chimerica Peculiarities
Chinese traditional strengths are based on long-term growth strategies combined with low labor costs, attractive exchange rate and high savings rate. Besides, Chinese economic phenomenon has a significant domestic consumption, which shifts China from a purely export oriented economy to a more balanced import driven economic model. According to Scissors (2010), there is a significant increase of investment infrastructure, which underpins structural changes in economy and positive government policies. Considering the fact that GDP per capita in China is quite low compared to the same indicators in America and Japan, it gives a good chance for Chinese rapid economy growth in order to catch up with most powerful world economies.
China can offer other advantages such as huge capital stock, foreign technology replication at minimal cost, tremendous productivity growth and cheap labor force in industry intensive branches (Pettis, 2009). China’s GDP per capita proves that Chinese growth potential and capacity is higher than an average growth rate of 7% annually achieved by the Asian Tigers (Singapore, Taiwan, Hong Kong and South Korea) when they were at the same level of development. The global crisis of 2008-2009 for China has gone unnoticed due to a tremendous foreign currency reserves exceeding $3 billion in 2009. Chinese productivity level and mobility rate still has perfect perspectives for future growth affecting the wage growth rate and GDP per capita (Wong, 2014).
According to Ferguson (2009), China represents around 13% of the world’s population and 1/3 of the global GDP providing no less than half of the world’s economic growth. Analyzing the statistics of the European Union and US in the 21st century, it becomes obvious that purchasing power parity in China has tremendously increased achieving an unprecedented historical rate. Global GDP share of Chinese economy has tripled since 4% in 1990 to 12% in 2015 while other leading economies (EU, Japan and US) demonstrated a substantial decline. Analyzing historical aspect, since 1980 China has increased GDP per capita almost 26 times and doubled country's GDP every 7 years by demonstrating a 10% annual growth rate. China may be called a phenomenal country since no other country in the world was able to reproduce this kind of rapid growth (Ferguson & Schularick, 2007). However, there are also other remarkable features of the Chinese global position, primarily dealing with the leading manufactures capacities overtaking the US palm of victory after more than 100 years of supremacy. Besides, China now is going to become the first country registering the greatest number of production patents and innovations.
Empirical evidence on the Eastern Chimerica growth phenomenon cover various aspects of the Chinese economic sphere. The first source of growth is low labor cost and extensive human capital, which provides manufacturing stability and maximal output with minimal input. Another important source of economy’s growth is strong governmental participation in all economic branches, which are regulated by the primary role of state policies. According to Ferguson & Schularick (2007) gradual and pragmatic approach to reforms, substantial foreign investments and capital controlling mechanisms, provide significant technological advancements and huge growth potential. Therefore, choosing emerging Chinese market as a place of production investors consider the stability of macroeconomic indicators.
Western Chimerica Peculiarities
American model of economy is characterized by the principle traits of global business and informational revolution. Globalization of business means integration of the country and its economic entities into the world economy. Recently more than half of revenues coming from large American corporations are obtained outside of the United States. The process of international trade and foreign investment take the priority importance in government policy. The US receive the leading foreign investment goods and technologies affording multiple branches and representative offices from Europe and Asia operate on domestic market (Zoellick & Yifu, 2009).
Strong international position of the US and leadership of American economic model determine the primary role of the country in the global economy. There is no other country able to compete with the US and demonstrate a more prosperous growth model. However, US dollar appreciation during the world financial crisis 2008-2009 has led to export decrease and import increase. The US balance of trade deficit achieved unprecedented rates being estimated at the amount of $240 billion. Any other country at this situation could face severe problems. Surprisingly, the US economy did not demonstrate any discomfort; on the contrary, import growth resulted in price decrease, broadening of consumer choice and creation of more than 2 million new work places in service sphere making manufacturers be more competitive.
Informational revolution is another powerful growth source of the US economy. This country has experienced a real informational boom by improving digital technologies, transforming companies and encouraging emergence of new manufacturing branches. The Silicon Valley (California) generates more than ten new startups weekly serving the locomotive of informational technologies development providing approximately one third of the overall economic growth.
Compared to Western Europe (Germany 19,5%, the Netherlands 22,6%) and Japan (29,7%), the US can be distinguished by a quite low level of investment savings (15,3% of GDP). Struggle with inflation resulted in discount rates decrease making Americans uninterested in bank savings. Population prefers to invest surplus cash to foreign exchange markets purchasing bonds and shares. Overstimulation of financial markets provoked unreasonable growth of speculation operations. Another reason for low personal savings level is consumer-oriented life style of American citizens. They would prefer to spend money buying goods and services, getting education and travelling.
Perspectives of Chimerica Relationship
Analyzing relations between both countries Ferguson (2009) broadens the geographical borders of Chimerica to practically global scale. Majority of Asian countries follow the Chinese example in national currency peg to dollar and accumulating of international currencies, what, in its turn, allow financing of payment deficit of the so-called “Anglosphere” and its satellites. According to Zoellick (2009), the largest consumer (the US) and the biggest reserve of free foreign currencies (China) should first unite all efforts in order to prevent the global recession. Both countries have already announced about packet measures, stimulated the national economies development (Clinton & Geithner, 2009).
Thus, China adopted a decision to allocate the stimulating packet in amount of 580 billion dollars aimed to realize infrastructural projects and social programs. Upon the whole, the Chinese allocated amount of financial resources equals to 12% of GDP. The major way to oppose the crisis, as was claimed by economic and monetary government in Beijing, is active stimulating of domestic consumption. Pettis (2009) Carnegie Fund expert, considers that analysis of domestic factors affecting American-Chinese economic relations should include all the three major macroeconomic variables (accumulation, consumption and investment), which working cumulatively sterilize the surplus share of “hot” money supply.
However, domestic factors play a more important role than extensive criteria such as the volume of trade deficit between the United States and China. Decrease of the latter may take place due to positive as well as negative scenarios stipulated by more fundamental reasons. Therefore, positive/advantageous possible scenarios of Chimerica relations can be described as follows:
Investments grow simultaneously with the growth of savings in the United States. If investments increase in the US, American foreign trade deficit does not decrease while the country has to import the difference between the volume of investments and savings.
The volume of consumption in China grows parallel to the savings level in the US leading to decrease of savings credit balance deficit in bilateral trade. Consumption growth forms additional cumulative gain of GDP in China and decrease of trade deficit in the US.
Negative/disadvantageous scenarios of Chimerica relationship are also possible.
Together with the decrease of American GDP, the level of savings does not increase despite the growth of the discount rates. Decrease of investment volumes may lead to decrease of deficit in trade with China.
Measures undertaken to reduce the volume of savings in China may result in substantial slowdown of GDP growth rate and a corresponding decrease of positive trade balance with the United States.
According to Zoellick (2009), both countries should try to “reload” the agenda of strategic economic dialogue between China and the US. The recipe advised to both countries to end the Chimerica relationship have an obviously traditional character. First, the US should try to reduce the volume of financial resources consumption. Simultaneously, China has to promote immediate measures on import stimulation not to face the risk of sharp and painful export dropdown. Second, it should be noted that China would become one of the most perspective options of American export growth. Already today, Chinese market takes the third place in ratings of the best American goods’ importers yielding only to Washington’s NAFTA partners (the North American Free Trade Agreement). Annual export growth rate patterns in the US and China’s bilateral trade demonstrate that such tendencies are able to not only positively affect the common state of the US trade balance, but also broaden the influence of “pro-China” lobby among the US economic elite. The US and China today are constantly looking for a mutually acceptable formula, reflecting the key characteristics of bilateral relations considering their role and place in modern global policy. The new perspectives are promoted by the existence of an institutional fundament, created during the crisis period, based on the mechanism of strategic and economic dialogue between the two countries.
Conclusion: Economic Perspectives/Consequences of Chimerica
The US expresses concern for the fact that China’s currency demonstrates weakness, which may destroy the fragile balance of global trade. Thus, the EU Bank and International Monetary Fund made a request for Chinese government with the advice to reevaluate RMB (national currency) to be more compatible with the US dollar or Euro. Undervaluation of RMB fall in the range between 25-50%. This undervaluation helps China to subsidize export imposing convenient tax rates on its import. Despite the US attempts to change the Chinese exchange rate policy, China rejects the fact of an unfair advantage and claims that a stronger RMB would be equal to a consumption tax on consumers. Overheated domestic growth, increase of bank level reserves and inflation do not seem to be convincing factors for China to reevaluate the national currency (RMB). Though, the stronger RMB could make China less export dependent promoting stability of the global economy, the major purpose of the US and Chinese government is to finally end the Chimerica relationship.
According to Schularick, (2010, p. 1) “a historically unique financial symbiosis between China and America, a phenomenon the authors call “Chimerica,” has dominated the world economy for the better part of the last decade now must end”. Discussions about possible incentives to interrupt Chimerica relations were provoked by the global crisis 2008-2009. The rise of the Chinese economy was prominent by huge currency intervention and accumulation of financial reserves. However, together with poorly regulated financial markets such economic policy has produced an asset bubble in America. During the decades China has adopted FDI flows and stimulate foreign trade by buying dollars to prevent own currency appreciation. Such currency interventions in world Stock Exchange markets pursue several goals: stimulation of export-driven industries and secure national economy from future financial crisis. By the crisis time Chinese currency reserves have achieved around 50% of GDP ($2,3 trillion). Ferguson & Schularick (2007, p.215) wrote “With a combination of governmental capital controls, tight regulation of credit and a huge pool of unorganized labor, China was able to operate a consistently undervalued real exchange rate without generating high inflation”. Opposed to China, the US economy was oversaturated by debts and burdened by the consumption boom. In 2008 total money spending was 50% higher than households’ actual income.
Some experts blame China for funding of America’s consumption orgy and real estate speculation games, claiming that if not for Chinese export driven economic model feeding the US economy, the American interest rates would have been much higher preventing the housing bubble. Thus, an only way of breaking the Chimerica relations is to re-evaluate Chinese national currency especially when major productivity gains are associated by substantial exchange rate appreciation (Ferguson, 2009). Therefore, not to threat the global economy the US have to control overvaluing of US dollar on Asian markets and prevent its artificial weakening against other currencies of economically advanced countries.
The next decades the Chimerica relations will be strongly reconsidered to improve the key structural imbalances concluded in the fact of RMB’s currency peg to dollar at “an extremely undervalued exchange rate” (Ferguson & Schularick, 2007). If America manages to reevaluate the Chinese currency upward against dollar, it will gain competitiveness in Asian markets; in case it fails to do so the US may face the challenge of deflation, which may be a shock to highly leveraged American economy causing another global crisis.
Adjustment of RMB exchange rate would encourage America to import demand from other markets instead of stimulating the domestic one. Such currency adjustment is also in China’s interest, while China being the largest holder of the US bonds is highly dependent on dollar volatility. This process will ensure a proper balance of international trade between China and the US preventing losses of dollar reserves for the Chinese economy.
References
Clinton, H. & Geithner, T., 2009. A New Strategic and Economic Dialogue with China. Wall Street Journal, Issue July 27.
Ferguson, N., 2009. What ‘Chimerica’ Hath Wrought. American Interest, Issue http://www.the-american-interest.com/article.cfm?piece=533.
Ferguson, N. & Schularick, M., 2007. ‘Chimerica’ and the Global Asset Market Boom. International Finance, Issue N 3, pp. pp. 215-239.
Pettis, M., 2009. Sharing the Pain: The Global Struggle Over Savings. Carnegie Policy Brief, Issue Vol. N 84, pp. pp. 6-7.
Schularick, M., 2010. The End of Financial Globalization 3.0. The Economists’ Voice, pp. pp. 1-5.
Scissors, D., 2010. Deadlines and Delays: Chinese Revaluation Will Still Not Bring American Jobs.. [Online] Available at: http://www.heritage.org/Research/Reports/2010/04/Deadlines-and-Delays-Chinese-Revaluation-Will-Still-Not-Bring-American-Jobs
Wong, H., 2014. HSBC in Mainland China: Investor Roadshow. HSBC Bank (China), pp. pp. 1-11.
Zoellick, R. & Yifu, L. J., 2009. Recovery Rides on The 'G-2'.. Washington Post., p. pp. 15.
