Martin Jacques - When China Rules the World

A key characteristic of the world’s leading power is its ability to create and organize an international economic system to which other nations are willing or obliged to subscribe. Britain ’s version was the international gold standard system which, prior to 1914, encompassed a large part of the world in some shape or form. In the interwar period, as Britain declined, this gave way to an increasingly Balkanized system based on currency areas, protected markets and spheres of interest. After 1945 the United States became the world’s leading power and the new system that was agreed at Bretton Woods, and further elaborated in the years that followed, was essentially an American creation, made possible by the fact that the US economy was responsible for over one-third of global GDP at the end of the war. That system only became truly global when China joined the WTO in 2001 and the former members of the Soviet bloc queued up to join the international system following the collapse of the Soviet Union. With China’s growing economic power, the greatest single threat to the United States’ global economic pre-eminence, apart from its own decline, lies in China’s attitude towards the international system. [1210] [1210] Zheng Yongnian, Discovering Chinese Nationalism , p. 140. Since Deng Xiaoping decided that the country’s interests would be best served by seeking admission to it, China has become an integral part of the international system, but China ’s attitude towards it will not necessarily always remain unambiguously supportive. [1211] [1211] Kynge, China Shakes the World , p. 214.

Take the IMF, for example, of which China is a member. During the Asian financial crisis, Malaysia and Japan proposed that there should be an Asian Monetary Fund, such was the level of dissatisfaction within the region about the role of the IMF. This was strongly opposed by both the US and the IMF, which correctly saw the proposal as a threat to the IMF’s position, and also by China, which was concerned that it had emanated from Japan. China has since abandoned its opposition and is now exploring with others in the region the possibility of creating such a fund. Any such body would undoubtedly have the effect of seriously weakening the role of the IMF. In the event of another Asian financial crisis, it is likely that a regional financial solution would play a much bigger role than was the case before. The power of the IMF, moreover, has declined significantly over the last decade or so, with its role as a lender having diminished. In fact sovereign wealth funds have injected more capital into emerging markets in recent years than the IMF and World Bank combined (see Figure 40). This brings us to the World Bank. As China ’s financial power expands, its ability to make loans and give aid will increase dramatically, as we have seen in the case of Africa, where Chinese loans already exceed those made by the World Bank; in time, Chinese aid and loans could dwarf those made by the World Bank on a global basis as well. [1212] [1212] China ’s Export-Import Bank is already a larger source of loans to Africa than the World Bank; Kurlantzick, Charm Offensive , p. 97. Meanwhile the WTO, with the demise of the Doha round — effectively torpedoed by China and India [1213] [1213] Keith Bradsher, ‘About-face Puts China on Side of India Over High Food Tariffs’, International Herald Tribune , 31 July 2008. — together with the growing popularity of bilateral trade agreements, presently looks rather less important than it did a decade ago when trade liberalization was in full swing. The process of trade liberalization in East Asia since 2000, indeed, has largely bypassed the WTO, with China playing a key role through bilateral trade agreements. Another institution of the present international economic system, the G8, acts as a kind of metaphor for the way in which the international system might come to look increasingly less relevant. Bizarrely, China, as of 2009, had still not been admitted as a member — and with the G8 being clearly unrepresentative of the global economy, it now suffers from a chronic lack of legitimacy. [1214] [1214] ‘World Economic Net Fights to Keep Role: World Bank, IMF and WTO Struggling Under Globalization and Other Pressures’, International Herald Tribune , 23 May 2007; Timothy Garton Ash, ‘ One Practical Way to Improve the State of the World: Turn G8 into G14’, Guardian , 24 January 2008. This was explicitly recognized in autumn 2008 when the world was faced with the prospect of the worst global recession since 1945: pride of place was taken not by a meeting of the G8, but a gathering convened by President Bush of a previously obscure entity called the G20, which included not only the rich countries but also China, India, Brazil, South Africa, Indonesia and other developing countries. It represented, at a critical moment, a belated recognition that the rich world no longer had sufficient clout on its own and that the big developing countries needed to be embraced if any action was to be effective.

The rise of China and the decline of the United States are central to the present global recession. The fact that China is such a huge creditor, based on its propensity to save and export, and the United States such a colossal debtor, based on its addiction to spend and import, reflects a deep shift in the balance of economic power between the two countries. The American consumer boom depended on China ’s willingness to keep lending to the United States through the purchase of US Treasury bonds. In its present enfeebled state, the United States is still enormously dependent on China ’s willingness to continue buying US Treasury bonds, even though the rate of return makes little sense from a Chinese point of view: the resources of a poor country could be put to far better use, as is now being openly discussed in China. [1215] [1215] Geoff Dyer, ‘ China ’s Dollar Dilemma’, Financial Times , 22 February 2009. But the Chinese, as I discussed earlier, are in a catch-22 situation: if they start selling US Treasury bonds, or cease buying them, the dollar will plummet and so will the value of their dollar assets. So a Faustian pact lies at the heart of the present relationship between the US and China, which in the longer run is neither economically nor politically sustainable. The United States ’ position as the global financial centre and the dollar as the dominant reserve currency are on a Chinese life-support system. At the heart of the present global financial crisis lies the inability of the United States to continue to be the backbone of the international financial system; on the other hand, China is as yet neither able nor willing to assume that role. This is what makes the present global crisis so grave and potentially protracted, in a manner analogous to the 1930s when Britain could no longer sustain its premier financial position and the United States was not yet in a position to take over from it. Any talk of a global solution to the present economic travails has to confront these highly complex and intractable questions.

As a harbinger of the decline, and ultimate demise, of the present US-DOMINATED system, there is the prospect of the emergence over the next decade of the renminbi as a reserve currency, which would mean it could be used for trade and be held by countries as part of their reserves. [1216] [1216] Another small step in this process is the decision to allow Chinese citizens to buy shares and mutual funds in London and New York through their local banks. This has hitherto only been possible for them in Hong Kong; ‘Chinese to be Allowed to Buy UK Shares’, Financial Times , 17 December 2007. Having acquired full convertibility against other currencies, it could rapidly assume a very important role outside China, acting as the de facto reserve currency in East Asia, marginalizing the yen, and challenging the position of the euro and ultimately the dollar as global reserve currencies. [1217] [1217] Yu Yongding, ‘Comments’, IMF Reform Conference, 10 October 2005, and ‘The Interactions between China and the World Economy’, unpublished paper, Nikkei Simbon Symposium, 5 April 2005. It is clear from the American financial meltdown in 2008 that the days when the US economy could sustain the global reserve currency are now numbered.