Tuesday, September 23, 2008

China as leader in the global financial crisis

Peter Drysdale over at East Asia Forum exposits claims by historian Harold James that only action by China can rescue the global economy from US financial ineptitude.  Indeed, to James, China is the US of the 1920s and 1930s.  China should become the anchor of the modern international financial system.

 James' argument:

'China is today’s America...When the 1920s and ’30s crisis hit, America alone had the capacity to take the big public sector action at home that was needed to stem the panic and economic collapse and the reserves to save Europe and the rest of the world from massive contagion. Andrew Mellon, US Treasury Secretary of the time, resolutely stood back, determined to let markets collapse and ‘purge the rottenness out of the system’. The collateral economic and geopolitical damage from that adjustment path through the markets was well and truly done before Roosevelt’s New Deal was put in place. Then, and now, a globalised world means that the solution to such crises spans borders. Aside from the US, only China...has the firepower to rescue the global conglomerates at the heart of the global financial system now under stress.


China, of course, has already played a role in picking up some of the pieces as the wheels fell off the US financial bus. As the crisis unfolded, Chinese and Middle East sovereign wealth funds recapitalised some of the debt of US and European institutions. But more recently Chinese investment Co (CIC) backed away from bankrolling Lehmann Bros. ....CIC backed away from picking up the tabs on Lehmann Bros as pay-back for US failure to act in the East Asian financial crisis and that is fanciful. This is only the micro play. The big play is the geopolitical paradigm shift that needs to deal China into its new responsibilities in managing the international economic and financial system. China can’t be expected to play its role in these affairs until it is brought into the centre of the global economic decision-making processes.

Meanwhile, the US crisis comes at a time that highlights the peculiar measure of influence and responsibility that rests upon China. Here, even more than in the East Asian financial crisis, China has the chance of making its own constructive and strategic contribution through underwriting policies to support a stronger RMB and boost continued growth of its own domestic demand. This will buttress the efforts of policymakers in Washington, serve China’s own national interests and leverage China’s role as an anchor of the international system'.

13 comments:

derrida derider said...

All true enough, but take the longer view here. Giving China "a voice in international economic decision making" is code for "acknowledging that the US is ceding influence to China". You don't retain influence by coming to the table as a mendicant.

The disastrous Bush presidency has greatly hastened the US' decline, though it's not the root cause of it.

hc said...

That's true - it signifies a shift in power toward China. It seems to me inevitable.

You are right China will have the upper hand here.

jc said...

Lordy

fellas settle down. 70% of China's economy is command and control. Their GDP is around 7 trillion while the US is $14 trillion.

By the 1920 the US was the largest industrial power in the world by far. China will NOT be the largest industrial power any time soon.

Frankly the idea that the US is about to eclipse is silliness.

jc said...

ummm sorry... to be eclipsed

conrad said...

I guess you need to give estimates of dates JC. It seems fairly likely to happen in my lifetime -- everytime I go there it's getting better. You can also see them slowly moving up the technology chain -- it will be a fun world once they can not only make and do all the crappy stuff we don't want to do anymore, but also do all the high tech stuff also.

jc said...

Conrad, God bless them and I hope the Chinese people do very well. However I really can't see how they can grow in linear fashion at the current rate when they have their entire banking system state directed in terms of who they lend to.

They have no major firm even now close to being a global brand and prospect any of that will change.

conrad said...

"They have no major firm even now close to being a global brand and prospect any of that will change"

Are you joking JC? Apart from firms like Yue Yuen that have monopolies on things like the world's shoe manufacturing, last time I checked, many of their resource firms were doing such a good job buying up the world's resources it was causing political problems. I might note here that Australia has no real world-wide consumer brands either, but it doesn't stop us from being rich.

gilmae said...

"They have no major firm even now close to being a global brand and prospect any of that will change"

Lenovo?

jc said...

G

Seriously who the f.... is Lenovo? I've never heard of them. Tell us about this astonishing global name that competes with apple, Amex and coke.

gilmae said...

I'll risk appearing foolish and take you at face value. They are one of the top four largest personal computer manufacturer in the world. HP, Dell, Acer and Lenovo. I can assure you, people buying PCs know who they are, even if they have slipped under your radio.

Sir Henry Casingbroke said...

Lenovo is the group that bought out IBM personal computers when IBM got out of that business. Lenovo is 27% owned by the Chinese govt, and only 7% by IBM. The rest is shareholding out there in the marketplace.

*******

Did China put the brakes on US equities and thus precipitated the liquidity crisis? Why would they do that? Well they can now swap some debt for equity. THAT would certainly give them a bit more influence.

Dubya will go down in history.

Gazza said...

A very humorous theoretical article indeed. Anyone who thinks China has the means or intention to 'rescue' the world from this financial crisis has spent too much time in the theoretical world and not enough time on the ground in China - enough said.

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