Saturday, 20 September 2008

Hugging China

Here is a question to you. If you were a geopolitical strategist working for the Chinese government, what would you be thinking about the global banking crisis?

First, your country’s exposure in US capital markets has just been dealt a substantial blow. Clearly, pulling out now is not an option, the drag on the market would be insufferable. (However, the US government bailout implies a free ride for you, as well.) 

Second, your speech writing tasks just got easier. Just as the rules have gone, so has any possibility of credible American lectures. Pretence international selflessness gives way to blatant national selfishness. At least one aspect of economic diplomacy just got easier.

Third, your global strategy space has widened considerably. There is a ripple across the meagre international policy architecture. The depth of this ripple as well as the lightning speed with which it has opened up, creates an appetite for designing global institutions. The previous status quo that so many newly emerged economies, first of all China, had outgrown is now in question across the board. It is the perfect time to push through your own reform agenda. 

Furthermore, the relative positions could not be more favourable for you. Your domestic economy has little direct exposure now, even though the long term Chinese buffers are probably substantially overestimated. (We will learn a lot about the internal dynamics of the Chinese economy the next months.) What might be more important is that your new allies, developing countries with inefficient economies but a lot of natural resources, will be hard hit, and would welcome a ‘global insurance pool’, otherwise known as a short term umbrella in exchange for access to assets. 

A combination of these would create a formidable Chinese negotiating position. If China were in alliance with many developing former Western-affiliated countries (Indonesia, and many states in Sub-Saharan Africa come to mind), it will have the flow of raw materials insured. The financial blow to the Chinese state assets will not have a direct impact in all, but the full-meltdown scenarios. The domestic real economy will be on a dynamo for a while, even if a slowing one. And any basis for western arguments against China’s ‘influence’ on its currency has just been blown up.

In short, China will feel little impetus towards playing a constructive role in building up the new global institutions the West will suddenly be so enthusiastic about. Maybe this is the moment to throw open arms, and give China a big, warm hug.


  1. A very good point indeed. The Chinese government has been excessively worried about the pressure it will get over the inflation China exports to the world. Have you heard a word about this the past ten days?

  2. Overall, things don't look too bad in Asia - the banks have taken some pain on US mortgage exposure, but it's manageable. They are still pretty well capitalised, and the economies are still growing reasonably well. Sentiment among small and medium investors is rather fragile, but the big players seem to be less panicked. I suspect many are sitting on their hands, partly because they need consensus to act. China has policy room on the fiscal and monetary front.

    Trouble is, the US is going to have to get used to paying off its debt burden over years, growth will slow and living standards will be hit. I think US bonds are dear, and equities are almost cheap, but sentiment can push both further in the direction of dear and cheap. Logic has gone out of the window.

  3. An interesting post on the lessons Asian policy makers might drawn in the long run.

  4. Talk about foresight! This post preceded the international agenda by at least 4-5 months.

    Where do you think China is heading now?


  5. And China in the Middle East comes onto the agenda.