The disaster of “Chimerica” – Can both sides be losers?

In early 2007, Niall Ferguson coined the term “Chimerica” to describe the economic relationship between the United States and China. At first, in 2007, Ferguson said Chimerica “seemed like a match made in heaven” – the Chinese did the lending, the Americans the borrowing. China and the US accounted for 40 percent of global growth from 1998 to 2007.

Now, Ferguson has decided otherwise. In a New York Times editorial written before Obama’s visit to China, Ferguson says, “Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 percent growth; America gets 10 percent unemployment.” Ferguson is not the only Western scholar to make these points – from articles I’ve read in the Economist to the Wall Street Journal to Reuters, there seems to be a general consensus that China could treat the US a little better, specifically through a currency revaluation.

The Western media has provided the Chinese point of view via vague and brief remarks from Chinese officials. Until I started reading Chinese blogs on the issue, I was unclear on China’s side of the story. As Abraham Lincoln says, “These men ask for just the same thing, fairness, and fairness only.” In such a complicated economic relationship such as the one between China and America, is there really a way to determine the “fairness” of the relationship?

Zhang Hongliang is an economist that has been writing blog articles concerning China’s economic and financial situation since 2006 and his blog articles have received widespread attention, especially for his biting criticism of “Chimerica” and the harm that it has done to China. He says that Chimerica is nothing more than a cyclical continuation of a colonial-style economy.

Last week, Zhang Hongliang came to lecture at Beijing University and made the following six points about the impact of Chimerica on China:

The formation of a new pattern of industrialization: The US enjoys the accomplishments of industrialization while China bears the burden of the negative effects of industrialization. This means that the three disasters of the modern economy are all shifted to China: environmental pollution and the depletion of resources, overproduction, and inflation. The formation of a new pattern of the distribution of wealth: Whatever China has, the US gets to enjoy. This double-loop leads to the outflow of China’s wealth and locks in China’s poverty. The formation of a new pattern of economic development: China has become the international milking cow and the world’s garage. In terms of the economy: foreign trade accounts for two-thirds of China’s GDP and foreign investment accounts for two-thirds of foreign trade. In terms of production: the West uses rules to control finance, capital to control resources, technology to control industry, and brands to control the market. In terms of resources: the West uses centralized planning to handle China’s market decentralization. The integration and assimilation of the interests of the wealthy people in the US and China intensifies the burden on the ordinary Chinese people. Political influences can be seen in the integration of US and Chinese policies. China’s policies have to account for and be built upon the foundations of American policy, and China’s decisions are all in consideration of the requests of the US. Cultural influences are noticeable in the increasing Americanization of Chinese ideology and culture. Not only is Chinese culture more and more resembling American culture, the way in which Chinese culture is changing is fulfilling the hopes of the US. Also, in terms of spiritual culture, China and the US are walking toward opposite ends of the spectrum.

In a recent blog article, Zhang Hongliang writes:

First, the US used dollars to get China’s goods, then they used bonds to get China’s dollars, and now they want to use stocks to get back their bonds, lastly, they will use the stocks to make China in debt; eventually China is not only handing over goods to the US in vain, not only handing over US dollars to the US in vain, but China will eventually be in debt to the US!

On the other side of the Chimerica coin, Ferguson writes:

The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages they reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China’s huge stock of Renminbi assets.

According to this Forbes article, the US is now spending trillions of dollars to help its own economy out of the recession, China’s main currency investment is also devaluing: dollars. In the end, China ends up financing the economic recovery of the US because they have to continue buying dollars to keep the value of the renminbi down and dollars up.

Now, I am not a qualified economist by any means, but it seems like the Chimerica model is failing in many respects. Otherwise, why would both sides be complaining about the relationship?

Rather than the symbiotic relationship it was supposed to be, it seems that both sides are realizing they have less control over the other than they actually need. China cannot control US spending and the US cannot control China’s currency values. The best case scenario will be that the past year or so will be a learning experience for both sides and the US and China can learn to cooperate, realize that not everything can be win-win and that long terms interests should not be sacrificed for short term gain.