A measure of China’s growing impact on the world is the leverage that it enjoys in its relationship with the United States (notwithstanding the fact that the United States still enjoys a much larger GDP than China and an immensely higher GDP per head) as a result of the economic imbalances which lie at the heart of their relationship. China is comfortably the largest exporter to the US, with Americans displaying an enormous appetite for Made in China consumer products. As the United States exports relatively little to China, the latter has enjoyed a large and rising trade surplus which has grown very rapidly since 1999. [567] China has invested this surplus in various forms of US debt, including Treasury bonds, agency bonds and corporate bonds – in effect, a Chinese loan to the US – thereby enabling American interest rates to be kept artificially low to the benefit of American consumers and especially, until the credit crunch, holders of mortgages. Although the US was deeply in debt, China’s continuing large-scale purchase of Treasury bonds (which I will use as shorthand for various forms of US assets held by China) allowed Americans to continue with their spending spree, and then partially helped to cushion the impact of the credit crunch. In September 2008 China ’s foreign currency reserves totalled $1.81 trillion – a sum greater than the annual economic output of all but nine countries. [568] The rapid growth of its foreign exchange reserves has made China a colossus in the financial world. The importance of this has become even more apparent with the Western financial meltdown. While Western financial institutions, many Western companies and even some countries have found themselves starved of liquidity, China, in contrast, is blessed with an abundance of it. Strategically this puts China in a potentially powerful position to enhance its international financial and economic influence during the global recession, for example by buying foreign companies, especially oil and mineral firms.
How China deploys its reserves remains a matter of great concern, especially to the United States, since most are invested in US dollar-denominated debt. If China transferred significant amounts into other currencies – it is believed that it holds rather more than 60 per cent of its reserves in dollars (with less than 30 per cent in euros), though this is a tightly guarded secret [569] – it would have the immediate effect of depressing the value of the dollar and forcing US interest rates to rise: the larger the sum transferred, the bigger the fall in the dollar and the larger the rise in interest rates. But the government is also faced with something of a dilemma. It would certainly make good economic sense for China to transfer a large slice of its reserves out of US Treasury bonds: the dollar’s value fell steadily in 2006- 8, then recovered somewhat, but there remains the strong possibility that its price might fall even further, perhaps precipitously so. China ’s vast dollar investments in US Treasury bonds furthermore earn miserable rates of return, which makes precious little sense for what is still a poor country. [570] However, if it tries to transfer significant sums of its reserves into other currencies, thereby provoking a further fall in the value of the dollar, then the value of its own dollar reserves will also decline. China is in a catch-22 situation. The two great, but utterly unlike, economic powers of our time find themselves – at least for the time being – in a position of bizarre mutual dependence. [571] This was graphically illustrated in the darkest days of the financial meltdown in September 2008, when it is believed that the Chinese were pressing the US government to rescue Fannie Mae, Freddie Mac and subsequently AIG out of concern for its holdings in them, and the Americans were understandably afraid that China might otherwise sell off some of its dollar reserves, with dire consequences for the value of the dollar and its role as a reserve currency. [572]
