A high-level meet between the Chinese and US heads of state is what is really required to rescue the global economy.
The long-run equilibrium between the mutually interdependent economies of China and the US is being rocked to the core. The Americans desperately require credit from the Chinese in order to survive, and the Chinese need to be able to sell their products to the US to maintain economic growth. In the past six months, this exchange has been insufficient, and both giants have started to panic. The Americans more so, as they are much more dependant on the Chinese.
It is becoming increasingly evident that the economic stimulus packages aren’t having the desired impact. The US is printing money to get its citizens to consume more, but the more money it prints, the more this loses its value. So, Americans are buying less. As a result, the Chinese can sell only fewer goods to the US and this, in turn, reduces what they can lend to that country.
The only solution is to give to the addicts what they require — at least, initially. The Americans need to be able to borrow much more money and the Chinese need to once again be able to sell their goods to the US. That’s why a meeting between the Chinese President Hu Jintao and the US-President Barack Obama during the G-20 summit in London is crucial. The biggest creditor (China) is going to meet the biggest debtor (US) — about half China’s forex reserves are held in dollars.
The aim of the talks should be to revive and stabilise economic activity. The Chinese and the Japanese have to buy as many as US-government bonds as possible. In return, the Americans need to be prepared to buy goods from China. This is the signal the world needs. The Europeans, including the Russians, and the West Asian countries should try to arrange similar agreements with the US: We lend you the money and you buy our goods. The new rules for international financial activity could be discussed in a bigger group at a later stage. Such consultations should also conclude that no country, even if a powerful one, should live beyond its means.
It is now time for the US and China to realise that they are interrelated and that it’s time for more collaborative action. Who has to take the first step? The healthier economy of the two. The US is basically bankrupt, the Chinese remain highly solvent. This year, the new US borrowings will be as high as the entire foreign reserves of the Chinese: $2 trillion. While the Chinese have practically no debts, the Americans have $11 trillion of debt. America’s economy is also four times bigger than the Chinese economy, and therefore so much harder to revive: When the US goes ahead with an $800 billion stimulus package, this is 6 per cent of its GDP; when the Chinese spend the same amount, it is 23 per cent of their GDP.
The Chinese also implement their programmes much faster. While the Americans are still discussing the details of their intervention, Chinese building contractors have begun purchasing heavy machinery again. While the American government is busy lobbying for its economic rescue package, the Chinese government handed out 100-150 yuan (about $14-22) vouchers to millions of people before the Chinese New Year celebration in January this year.
It is very likely that in the biggest global economic crisis since ‘Black Tuesday’ in 1929, China will still be in the position to save money without compromising social stability. International banks and rating agencies assume that, in 2009, the increase of China’s foreign reserves will dwindle by more than 50 per cent. Despite this, the Chinese will still be able to save $170 billion. Even if the foreign reserves do not grow for another one or two years, it won’t break China’s back. That’s because the Americans, Japanese and Europeans will be accumulating debt each day.
“It is a moderate decrease”, says China’s Federal Reserve Bank Governor Zhou Xiaochuan. “But we will remain vigilant to avoid a sharp downturn.” The economic stimulus package already showed some results. “The economy has partly recovered”, said Prime Minister Wen Jiabao. That was confirmed by the statistical data on December 2008 which was published recently. According to Wen, China is going to be the first country to overcome the financial and economic crisis.
It is still too early for the Chinese government to relax. During the first half of 2009, the economy may decline further. But the Chinese have a comparatively larger room for manoeuvre.
China has the strength to carry responsibility without risking its social stability. The same kind of responsibility that the Chinese assumed for Asia during the Asian financial crisis during the late 1990s. China now has to strengthen the dollar, the currency of its strongest competitor, even if it doesn’t like it.
Why should China do this considering it is doing so well? To avoid a worse global situation. As soon as Obama was sworn in, Washington began sending strong messages to Beijing. The new president will “offensively exhaust all diplomatic tools at his disposition to bring China to change its fiscal policy”, declared the new Secretary of Finance Timothy Geithner. “China can no longer have a free ride and undermine the principles of free and fair trade.” These are harsher messages than one heard during the last two years of the Bush administration. “We hate you guys”, said Lu Ping, director general of the China Banking Regulatory Commission recently — “Once you start issuing one or two trillion dollars, we know that the dollar is going to depreciate.” He has a good reason to be angry: Half of the Chinese foreign currency reserves are in dollars. During his annual press conference last Friday, China’s Prime Minister Wen Jiabao expressed doubts as to whether the US would be reliable as a debtor when he said, “To be honest, I am a bit worried”. The situation is tense as indicated by the concerted and lengthy reactions by the Americans, including Obama, who assured the Chinese that investors can have “full confidence” in the US. Even at the top official level, the tone is becoming brusque.
The Chinese government is now in a position to act wisely and take the wind out of the American sails. It is the right moment for it to propose to the US, a G-2 summit to jumpstart the global economy.
The bestselling author Frank Sieren has been living in Beijing for 15 years and is regarded as one of the leading German China-experts. His brother Andreas is a specialist in international relations and development aid. He worked for many years for the United Nations in Asia and Africa
