Table of contents
2. The Sino-American symbiosis
3. Drawbacks of Chimerica and the role of the financial crisis
4. Revaluation of the Renminbi
5. Future perspectives of Chimerica
7. Reference List
The symbiotic relationship between China and America, also referred to as Chimerica, was built upon mutual advantages, such as a boost in exports for China in return for cheap credit provided to America. However, during the financial it became apparent that the relationship had caused international economic imbalances, especially due to the incapacitation of the Dollar-Renminbi exchange rate mechanism. This essay will analyse the relationship of China and America, and elaborate on the potential for an end of Chimerica with a focus on the role of the financial crisis. Furthermore, it will discuss whether there is a need for revaluating the Renminbi (RMB) and provide an assessment of Chimerica’s future prospects. The literature can be divided into liberal internationalist and nationalistic views (Zhao, 2014). This essay follows a liberal view, but intends to give a balanced view.
2. The Sino-American symbiosis
The symbiosis has flourished based on an intricate chain of cause and effect (Ferguson, 2007). China’s integration into the world economy caused a surge in China’s exports, mainly (21% in 2015) to America (Ferguson and Schularick, 2011; OECD, 2016; Census, 2016). However, the RMB did not appreciate, as a floating currency would have, because the RMB was pegged to the US Dollar (USD). Furthermore, the People's Bank of China (PBOC) has accumulated US treasuries, worth 1,816,923 million USD (equivalent to 18% of China’s GDP) (Fed, 2015; World Bank, 2016a), with manifold effects on America: It provided America liquidity, kept interest rates low, prevented the USD from depreciation and created a huge customer base that had no incentive to save, but instead imported from China. Figure 1 illustrates the relationship between Chinese holdings of US Treasuries, US imports from China, and China’s current account surplus.
Abbildung in dieser Leseprobe nicht enthalten
In consequence, the American economy consumed more than it produced and created a large current account deficit, while savings and investments of Chinese corporates piled up. Contrary to the expectations of market-based economies, the Chinese economy did not experience inflation, nor did wages increase. Underlying reasons are the large supply of unskilled workers and the installed capital controls by the government (Ferguson and Schularick, 2011). The integration of China into the global economy has decreased the capital-labour-ratio, which increased the return on capital substantially, while global interest rates continued to decrease (Ferguson and Schularick, 2007).
The undervaluation of the RMB provided China with a comparative advantage in the form of alluring low-priced exports, which contributed in the GDP growth rates. Furthermore, this endorsed foreign technology investments, which pledged in increasing productivity levels as well as creating jobs. A further advantage of possessing US treasuries is the reduced risk of contagion in case of a currency crisis, which other Asian countries had to experience during 1997 to 1998 (Ferguson, 2007).
On the other side, American corporates were provided with the opportunity to produce at low costs, which lead to an increase in corporate profits from 7% of GDP in 2001 to 10% in 2014 (Ferguson, 2007; FRED, 2016). Furthermore, America was able to sustain low interest rates, which promoted investments, without increasing their savings.
3. Drawbacks of Chimerica and the role of the financial crisis
Although, Chimerica featured economic prosperity, it also has its drawbacks. The two countries are overly dependent on each other, as China’s high GDP and export growth was primarily fuelled by the American consumption. Further, the value of the USD is subject to security holdings of China, which in turn is concerned of the USD’s value, due to the large proportion of US securities within China’s reserves. This makes China not only vulnerable, but also dependent on monetary decisions that are based on the benefits for the American economy, not the Chinese economy (Dyer, 2009). Furthermore, America’s budget deficit increases, but exports cannot be stimulated, as long as the USD is pegged to the RMB and is not able depreciate and thereby become more competitive (Wolf, 2009). Moreover, America was faced with increasing unemployment rates, as manufacturing jobs were “exported” to China (Garrett, 2013).
Besides, Chimerica built the basis for the supreme mortgage crisis, as the flow of capital from China to America was not incentivised by higher returns, but by China’s interest in a strong USD. Households had no incentive to save and massively invested in the housing market that was highly inflated. Amongst other reasons, it was the excess in cash that created the asset bubble in the American housing market, which resulted in high unemployment rates (Ferguson and Schularick, 2011).
Ferguson and Schularick (2007) expected the financial crisis to be a turning point in the Sino-American relationship. The prerequisites for an end to Chimerica are a decrease of spending in America and an increase of spending in China in order to cause a depreciation of the USD and an appreciation of the RMB. This could ultimately lead to a rebalance of trade accounts. The US would have to strengthen the financial sector and invest in productivity growth, while China would have to enhance its social welfare system, make consumer credit more accessible and raise wages. A reduction in corporate saving could be incentivized via easier access to credit or by liberalising the affairs of multinational corporations (Elwell, 2013).
As long as both economies flourished, the relationship was not scrutinised. However, after the financial crisis, the US accused China of monetary manipulation, whereas China accused the US of having caused a global financial crisis via its profligacy (Zhao, 2014). Consequently, headlines, such as “Their [the Chinese] oversaving is partly to blame for American overspending” circulated the world press (Zhao, 2014, p. 9). However, the two economies are highly interlinked, and thereby not easily separable. In the aftermath of the financial crisis, Chimerica prioritised fighting and overcoming recession over ending the relationship. While the US stimulated demand (and thereby also imports) via quantitative easing (QE) and fiscal stimuli, for China, the fastest escape from recession was increasing exports by investing in the corporate sector (Garrett, 2013). Besides, China was not in the position to sell US treasuries, as the disposal would reduce the value of China’s reserves. Furthermore, China had to prevent an appreciation of the RMB, as job security in the exporting sector was low (Hatoyama, 2010). America’s trade deficit with China was reduced by 13% from the first five months of 2008 to the first five months of 2009, compared to a 60% decline in the trade deficit with the rest of the world (Garrett, 2013). This even means a relative importance increase of the trade deficit between America and China. Consequently, measures taken after the financial crisis did not lessen imbalances but even exacerbated them.
Nevertheless, both countries have taken steps towards a decrease in mutual dependency since 2008. The House of Representatives in the US, for instance, introduced the Climate Change bill in June 2009 that imposes tariffs on imports from countries with high carbon emissions, such as China (Garrett, 2013). The Fed has tightened monetary policy in 2013 by tapering its QE, referring to a $10 billion decrease in monthly purchased bonds (Kurtz, 2013). Furthermore, the key interest rate has been raised in December 2015 by 0.25 percentage points to a range of 0.25% to 0.5%, which was the first time since 2006 (Gillespie, 2015). These measures were implemented in order to stimulate savings, decrease imports and thereby reduce the current account deficit that the US faces.
China on the other side has cut taxes and loosened credit policies in order to stimulate domestic consumption (The Economist, 2008). Within the first half of 2009, the PBOC has induced the banks to issue new debt worth 10 trillion RMB (equivalent to 40% of China’s GDP) (Ferguson and Schularick, 2011). Other measures that China implemented in order to stimulate consumption are subsidy programs for durable goods, like televisions and cars, as well as voucher programs, for instance, some local governments pay their civil servants partly in vouchers (Quelch, 2009). In May 2015, China reduced taxes on imported consumer products in order to boost domestic spending, as many consumers purchase high-taxed products abroad (Burkitt, 2015). Furthermore, China has lowered the lending-rate (from 4.85% to 4.6%) and the required reserve ratio (RRR) for banks (from 18.5% to 18%) in August 2015, which are measures taken to increase liquidity and prevent an asset crash, especially in the urban housing market (CNBC, 2015). In addition, China has abandoned the link between the RMB and the USD towards a more market-based approach (Ferguson, 2015), which will be discussed in more details in the following section.
Although, the financial crisis disclosed major disadvantages of Chimerica, which lead to both countries taking steps towards regaining their independence, it did not mark the end of the relationship, contrary to the prediction of Ferguson and Schularick (2011).