Monday 8 June 2009

How China became America’s banker

It took just three decades for China to transform itself from an economic backwater into America’s banker.

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Guanyu said...

How China became America’s banker

Samantha Kierath
8 June 2009

It took just three decades for China to transform itself from an economic backwater into America’s banker.

Since the reforms began in the late 1970s, China has posted average annual gross domestic product growth of more than 10 per cent, helping pull millions of Chinese out of poverty and securing the country’s position as one of the world’s biggest economies.

In The Ascent of Money, British historian Niall Ferguson outlines the financial mechanics of the mainland economic miracle but also describes how those developments have led to the creation of a land on Planet Finance called Chimerica, where US spenders and Chinese savers exist in a tense relationship that threatens to escalate into conflict.

The description of Chimerica is the endnote in a sprawling history of world finance and its contribution to social change that goes a long way to explaining the sources of today’s global economic crisis.

Ferguson’s survey extends from the use of clay tablets to log agricultural transactions 5,000 years ago in Mesopotamia to the creation of the first central bank in Amsterdam and the emergence of insurance and exotic financial instruments.

His big point is that money has been a major driver of human progress through the ages, despite the creative destruction of bubbles, panics and crises. Even though the recent flap of a “subprime butterfly’s wings” set off a global financial hurricane, he says, economies that have adopted funding tools such as banks, bonds and share markets tend to do better in the long term.

This brings us back to Chimerica, the uneasy merger of China and America into an economy that produces 33 per cent of the world’s output and where changes in economic topography have seen a reversal in the centuries-old flow of capital from west to east.

So, how did China become America’s banker? To make sure that the manufacturing sector had the best chance of continuing to employ the country’s immense pool of labour, China bought up billions of US dollars to ease upward pressure on the value of the yuan.

The result was cheaper Chinese exports to the US, lower global interest rates and higher US corporate profits. It also led to a flood of cash and a surge in lending.

Ferguson says that as the recession plods on and commodity demand and supply pressures push up prices and encourage a scramble for natural resources, political tension between the two countries is set to rise.

Complaints in the US Congress about currency manipulation by China are likely to grow louder, irrespective of counter-arguments that the US has engaged in its own form of currency manipulation through “monetary loosening”.

The Ascent of Money covers too much ground to satisfy a mainland business specialist but is a handy guide for anybody who wants to know but is too afraid to ask for the definition of a hedge fund.

Samantha Kierath is a freelance writer