"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, January 18, 2011

China Rising

President Obama greets Chinese President Hu Jintao during the Nuclear Security Summit. (AP/Susan Walsh)

The Financial Times today has an article titled: "China: A Strategy to Straddle the Planet," which covers many of the trade and currency strategies employed by China this blog has commented on.  At the end of the day, these strategies represent a significant risk to the dollar's dominance.  The risk is not necessarily one that the dollar is replaced by the Yuan, but a risk of the dollar slowly losing its relevance in global trade, which to me, could have severe inflationary and national security consequences for the US.  Here are portions of the article, emphasis mine:
Welcome to a new era of globalisation, China-style. As the financial crisis recedes, one of the big fears is that the process of increasingly closer links among big economies worldwide will go into reverse as governments and countries look inward. The message coming from the world’s second-largest economy for the past year has been clear: China wants to accelerate the integration of the global economy, but on its own terms. 
Over the past few decades, China has benefited hugely by hitching itself to a process of globalisation where the rules were written in Washington and the American consumer was the buyer of last resort. China prospered by making first the socks, then the washing machines and finally the iPods sold at Walmart. 
Coming out of the crisis, China wants to forge a new phase of globalisation where many of the roads – financial, commercial and perhaps eventually political – converge on Beijing. China is not seeking a rupture with the international economic system (although some foreign companies are fearful of a technology grab). But it is looking to mould more of the rules, institutions and economic relationships that are at the core of the global economy. It is trying to forge post-American globalisation. 
In recent years, a range of important countries have found that China rather than the US is their principal trading partner, from neighbouring Japan and South Korea to commodity-rich Australia and Brazil. At times over the past year, Chinese imports of oil from Saudi Arabia have exceeded Riyadh’s shipments to the US. 
With the help of its considerable financial firepower, China is deepening these links. Beijing is establishing trade relationships that allow it to sell not just clothing and consumer products but more sophisticated goods such as power equipment. Its banks are helping to expand infrastructure and energy supplies in other developing countries in ways that will accelerate their growth, boost two-way trade and bind them closer to the Chinese economy. Beijing is also looking to establish a role for its currency in the international monetary system, in part at the expense of the dollar.
the article continues...
Beijing’s global push is helping to open new markets for Chinese goods and also serves a broader strategic goal for Beijing, reducing dependence on the US. The American consumer may still be one of the main driving forces in the global economy, but about half of China’s exports now go to developing countries. The big ticket loans also further China’s efforts to diversify foreign exchange reserves away from the dollar. 
Some of China’s post-crisis objectives represent a more explicit challenge to US leadership of globalisation. Take, for instance, China’s long-term plans to internationalise its currency, which have been sharply accelerated over the past year. The immediate goal is to make the renminbi the main currency for trade in Asia, reducing costs for Chinese exporters. Some of the loans to Mr Ambani’s empire are in renminbi – with the Chinese offering to help hedge the currency exposure.
But among Chinese officials and scholars, there is a widely held view that the US has been abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. Nor do they hide the underlying geopolitical objective of the currency push – to place limits on the role of the dollar in the international monetary system. “The financial crisis ... let us clearly see how unreasonable the current international monetary system is,” Li Ruogu, head of China EximBank, said last year. Jiang Yong, at the China Institutes of Contemporary International Relations, puts it more starkly: ending US dominance of the monetary system is “as important as New China’s becoming a nuclear power”.
And on China's "neo-mercantilism":
China’s investment largesse also risks sparking a backlash. In some resource-rich nations, such as Australia, its form of state capitalism raises fears that the mining sector will be the Trojan horse that leads to Beijing’s control of commodity prices. In Africa, where China has done deals with some of the weakest governments, there are signs of a backlash by groups protesting at corruption or poor working conditions. “Western companies [in Africa] have cleaned up their act in the past decade, but China is turning the clock back,” says Paul Collier, an Oxford Africa expert. “It is no defence to say: ‘You plundered the poor, so now it is our turn’.”
Misthos here.  This, in my opinion, is where the US and China may be heading towards a collision course.  The US has used this strategy of partnering with corrupt regimes with significant repercussions, often called "blowback."  The view is that at first a larger developed country invests in what used to be called a "third world" country, and to protect its investments, it would partner with a corrupt regime - a "client" government that received exhorbitant aid.  Over time, the corruption bled the local population to such a degree that radicalization of the population ensued.  More corruption produced more radicalization, which produced brutal police state tactics by the regime in power to suppress any popular revolts.  Eventually, such regimes are toppled, or replaced, but not without  external military involvement - Iraq is a perfect example.  Sometimes the corruption produces a non-cooperating regime with long lasting consequences such as the Shah of Iran being replaced by the Mullahs, or a Khaddafi or Fidel Castro.

If and when China faces such obstacles, will it be ready to send the Chinese Red Army to Africa?  When that happens, I assure you, overnight, it will become a very different world.  The US will respond in ways that few can imagine. Because of China's enormous population and corresponding resource needs, the potential US-China rift could make the US-USSR Cold War look tame by comparison.  China will fight to feed her people, for she still remembers the Tianamen Square uprising.

The article touches upon this geopolitical, military empire trend:
Perhaps the biggest risk to China’s ambitions lies in the security tensions they are provoking in its own backyard. Just as quickly as Asian countries are integrating with China’s economy, they are also rushing into the arms of the US for military protection against a more assertive Beijing. 
Vietnam invited the US navy to hold a joint drill in the South China Sea last summer. During a bruising diplomatic dispute between Japan and China in the autumn after the Japanese coast guard arrested a Chinese fishing boat captain, China appeared to halt exports of rare earths to Japan. For the rest of Asia, it was a chilling reminder that their economic links with China could leave them exposed if they have a political falling-out with Beijing.
For all the economic optimism coursing through Asia at a time when much of the developed world is still struggling, it is worth reflecting on another important difference: while defence spending is under pressure in the west, in Asia it is rising strongly. China is the reason for that, too.
I have written on China in the past, and these articles are still relevant:

The Next Largest Nuclear Powers, China and Russia, Openly Challenge US Economic Supremacy

Is China Preparing for the Ultimate Fiat Collapse by Grabbing All the Gold It Can?

Pat Buchanan Asks: Who Fed The Tiger?

But we should not forget, China has headaches of her own:

George Soros Warns China of Global Economic Collapse

Chanos on China's Bubble...

And I have written on what the US can do in retaliation to a Rising China. Gold could settle things militarily, economically, and geopolitically overnight should the US find itself in a corner:

Don't Discount the US or the Dollar Just Yet...

As Napoleon once said of China:

"Let her sleep, for when she wakes, she will shake the world."

Either way, prepare for some economic and geopolitical tremors this decade.

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