China and the United States – a New World Order? Part I

It is several years since the relationship between the two giant countries USA and China came to the center of geopolitics. The financial crisis has further helped to bring this issue into focus.

  • What are the characteristics of the relationship between the two countries?
  • On what basis do American and Chinese power rest?
  • How does the financial crisis affect US-China relations?
  • How much of a challenger is China?

2: American-Chinese symbiosis

China and the United States are bound together by strong and important trade ties, which characterize the relationship between the two countries in all fields. About 10 percent of China’s exports go to the United States, while China is the third largest export market for American goods. In the last ten years, US exports to China have increased six times faster than US exports to the rest of the world.

For the past twenty years, China has had significant trade surpluses every year. With that, the country has, among other things, built up huge foreign exchange reserves – a total of more than 2000 billion dollars. In addition, the country receives large amounts of foreign investment. This would normally lead to a strong Chinese currency (yuan) against the US dollar, and thus a significant disadvantage for exports from China, a country located in Asia according to Therefore, the Chinese authorities decided to tie the yuan to the dollar.

The trade imbalance between the two economic giants was about $ 260 billion in China’s favor in 2007 – the United States’ largest deficit with any country. US politicians and the US business community dislike this deficit, and President Obama said during his first meeting with his Chinese counterpart Hu that he aims to halve the trade deficit with China.

China has bought up large amounts of US government bonds (government securities), ie in practice US debt. The country has thus become the world’s largest owner with a total value of approximately USD 700 billion. US Secretary of State Hillary Clinton has publicly asked China to continue investing in US government bonds to help the US economy.

However, the dependence is mutual. China still needs economic growth to ensure social and political stability . The Chinese are thus dependent on being able to continue exporting their goods abroad, not least to the United States. China is also dependent on the United States because it owns such large amounts of US dollars. If the dollar value falls significantly, the value of Chinese savings will do the same.

When Chinese Prime Minister Wen Jiaobao stated that he was concerned about the value of Chinese investment in US debt, the dollar immediately fell. China is therefore facing a dilemma: The country has such large amounts of dollars that if they sell, the price will fall and China will lose money. There is therefore pressure on the Chinese authorities to spread capital in more fields than just the US dollar. China’s central bank governor has aired the idea of replacing the dollar as the world’s reserve currency with a basket of currencies controlled by the International Monetary Fund (IMF). The basket is intended to contain dollars, euros, pounds and yen.

3: The financial crisis

China and the United States are blaming each other for the financial crisis. The United States believes that China saves too much, while China believes that the United States has too much consumption. China says the United States has taken a too liberal market line and allowed the market to govern itself with little government regulation. China itself has had relatively strong control and thus been able to more easily implement measures to mitigate the effects of the economic downturn.

At the same time, the United States recognizes that China as the world’s third largest economy plays a key role in the global economy, and that it is therefore necessary to work with China to emerge from the financial crisis. Secretary of State Clinton said during his visit to Beijing in February that it is not possible to turn around the economic crisis without Chinese cooperation and leadership.

President Hu belongs to the wing of China’s Communist Party that believes a strong state is needed. Another wing wants more market liberalism . In the wake of the financial crisis, it thus appears that China and the United States have come somewhat closer together in their economic priorities. Both Obama and Hu now want stronger control and regulation of the global economy – especially by international financial institutions. Furthermore, the two economic powers agree to spend more government money to increase demand, and here they differ from large parts of Europe.

4: The International Monetary Fund (IMF)

China has said it will give $ 40 billion to the Monetary Fund to increase the fund’s funding capacity. This gives China a voting right of 3,997 percent, up from 3,807 (the United States has 17 percent by comparison). The Chinese believe that their influence in the Monetary Fund is too small in relation to the size of the country, and not least the size of the country’s economy. Therefore, the authorities see the increase as a small but important step towards greater influence, not only in the Monetary Fund, but in international financial systems in general.

China and the United States 1

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