It has become increasingly common to suggest that on top of the European debacle and the sluggish recovery in the United States, China might be on the verge of a collapse, and with it the last bastion of economic growth in the world economy would also be gone. Not only the center is stagnant, but also the periphery of the global economy is very fragile. But the probability of a Chinese slowdown is greatly exaggerated.
Paul Krugman, who has been correct about the need for fiscal expansion in the United States, and about the European Central Bank (ECB) mismanagement of the Greek crisis, for example, has suggested that China is in the middle of a housing bubble that can burst at any time (see also Jayati Ghosh and C. P. Chandrasekhar here for a similar, but broader view of the dangers in 2012). This view insinuates that growth in China is fundamentally dependent on domestic demand, but that the sources of the expansion are fragile. It, further, suggests that China now looks very similar to the US before the Lehman Brothers crisis in September 2008.
Signs of a New World Order are everywhere here in the French Riviera, as the elite city of Cannes hosts the G20, the ultimate elite club. The local business rag, the Riviera Times, trumpets a recovery of the tourism business during the 2011 summer season – thanks to a 50 percent increase in visitors from China.
In my hotel lobby there are stacks of China Daily, but no such freebies from the newspapers of the Old World Order powers. Walking by the kiosks, though, I see European headlines rejoicing at the likelihood that China will aid in the Greek bailout. The head of the European Financial Stability Facility, the pot set up to rescue basket case countries, traveled to Beijing last week and rattled a tin cup for donations from China’s $3 trillion reserve fund. This comes amid news that Chinese investors have acquired distressed Swedish carmaker Saab. (They already own Volvo.)
How will China’s juggernaut status affect the G20’s agenda? In both positive and negative ways, in my view. On the positive side, they could hold some of the other governments’ most extreme free market tendencies in check. Take, for example, some of the positions the Obama administration is pushing in bilateral and regional free trade agreements. In the recently signed treaties with Panama and Colombia, they pushed through new rules that ban the use of capital controls, despite the fact that many countries are using these policy tools to combat financial volatility and the International Monetary Fund is recommending them in certain circumstances. The Chinese government, a capital controls user, would never go along with it if the Obama administration tried to push such nonsense at the global level.
Remember the WTO– the institution that we loved to hate? We haven’t been hearing much from or about the institution since its 2003 meeting in Cancun Mexico. That meeting marked the emergence of open conflict between wealthy and developing nations on a number of issues (such as agricultural protection). The conflict left the institution frozen and irrelevant. It now stands on the sidelines as policymakers crisscross the globe signing bi- and multi-lateral agreements.
The G20 seems to be outpacing the WTO in the march toward irrelevance. When it was organized in the early days of the financial meltdown, many progressives (including me) viewed the G20 as an embryo from which new and at least somewhat more inclusive discussions of global economic policy could emerge. In its early days the shock of the global crisis seemed to have engendered a genuine “Keynesian moment.” G20 leaders collectively declared the death of the Washington Consensus, indicted the financial sector for its misdeeds, acknowledged the economic firepower of the rapidly growing developing countries that became new lenders to the IMF, and took tentative steps toward amplification of the voice of developing countries at the IMF and World Bank.
Triple Crisis blogger Mark Blyth originally published this article in Foreign Affairs Magazine.
Last week’s EU agreement to refinance Greece’s debt seems to have calmed markets concerned with the possible default of Greece and subsequent contagion in the eurozone. But EU refinancing was not the only solution on offer: in June, an entirely different solution was hinted at from an unlikely source.
When Chinese Premier Wen Jiabao was on a tour of European capitals last month, he stressed two things at each stop: that a stable eurozone is vital to China and that China is Europe’s friend. Indeed, from Beijing’s perspective, when it comes to Europe, self-interest and altruism neatly coincide. If China were to buy only half of all outstanding Greek sovereign debt (a bargain at around $220 billion, a fraction of China’s dollar assets), it would not only resolve the eurozone crisis and add to Chinese prestige but it would help give Beijing the sort of reserve asset that it needs to diversify its holdings out of dollars. Currently, 70 percent of China’s reserves are in dollars, and China does not even make the list of the top 40 holders of Greek debt. But why would China not take such an opportunity?
For one, China probably has as little faith in the EU’s ability to solve its debt crisis over the long run as do the rest of the world’s financial markets, more bailouts notwithstanding. But another answer is possible — one that links the 2008 financial crisis and the 2011 European bond market crisis to a possible Chinese end run around the 2007 Foreign Investment and National Security Act. This U.S. law makes it hard for China to diversify out of its $3 trillion-plus holdings of U.S. dollars and buy sensitive U.S. assets such as aerospace, technology, and defense-related companies.
As a result of the unintended consequences of U.S. and European actions in financial markets, there is now the possibility that, even with this latest bailout, China could buy such sensitive assets from Europe, at fire-sale prices.
In 2006 Niall Ferguson and Moritz Schularick invented the term ‘Chimerica’ to illustrate the economic linkages that connected China and the United States. The new term summarized the fact that the world economic order was dominated by the combination of these two giants. Ferguson and Schularick also used the notion to explain the evolution of the asset price bubble in the US between 2002-2006. Their conclusion was that this new entity was an unsustainable chimera that should one day disappear. The time for this may be here.
Triple Crisis blogger C.P. Chandrasekhar was interviewed by Newsclick on the ongoing “currency wars” between the US, China, and other developing countries. This contentious issue will be a priority for many leaders attending this week’s G-20 meetings in Seoul.
Triple Crisis blogger Gerald Epstein was interviewed by the Real News Network on the recent focus on China’s monetary policy in US politics and media. He asks whether this currency war is a diversion from the real problems facing US economy.
Guido Mantega, the Brazilian Finance Minister, said recently that Brazil is in the middle of a currency war. His preoccupation with exchange rate appreciation is not directed to global imbalances, in general, or China, in particular. A more depreciated currency provides protection for domestic production, and makes domestic goods and services cheaper for foreigners. In that view, a stable but competitive (i.e. depreciated) real exchange rate (SCRER), as Roberto Frenkel and Lance Taylor call it, would be an essential tool in the development strategy in developing countries. The message is that competitiveness of domestic markets matters for development.
On June 29, Triple Crisis blogger Kevin Gallagher interviewed Andong Zhu of Tsinghua University in Beijing China about China’s worker strikes and growing inequality.
Q: There has been a lot of discussion recently about the over-valuation of the Chinese currency. How do we know how much it is overvalued? What would the implications be for US and Chinese workers if the government were to decide to devalue it?
Chandrasekhar: The argument really is that the Chinese currency is undervalued (because it is pegged to the dollar through central bank intervention) and needs to appreciate so as to make the dollar prices of Chinese exports higher and the RMB price of Chinese imports lower.