China is a big superpower in today’s financial markets. Please discuss this in relation to the European debt and the US-China relationship.
This was written during my Finance102 - Financial Markets course. It was about 2 years ago but I still find it quite an interesting read. The language is poor because it was written under time constraint and some facts might not be fully representative of the situation.
I agree that China is a one of the big superpower in today’s
financial markets but definitely not be world’s biggest superpower.
China is the largest creditor (as at Nov2010, China owns
about a third of US debt) and with the ability to bail out European countries
from debt crisis. With such a fund, China Vice-Premier has recently visited
Europe and pledged to pump money into Spanish bonds in order to decrease
reliance on U.S as an export market. The European Union has always been the
biggest export market for China, hence China‘s investment in European debt came
in as no surprise to most people. Also, considering that Europe constitute 27%
to world’s GDP and US accounting about 23%, it is only natural that China will
soon increase its reserve in terms of Euros in order to diversify its reliance
on the US. China currently holds about 35% reserves in US and 10% in Euros,
therefore it is normal for China to buy up Euro debt crisis. To add on, Yuan is
also a controlled currency and therefore they are diversifying such that they
are not relying too much on US.
What is more disturbing to me is what I think is the
“actual” reason in China’s move to buy up Euro debt. Many people may say that
it is only natural that China will soon step in to help the Euro zone. One
thing many people did not notice is that even though Europe is China biggest
export market, Europe is also the one of the biggest import market for China.
(net export in Euro < US) I suspect the reason behind China’s buying of Euro
debt is partially due to its heavy reliance on buying manufacturing machinery
from Germany etc. Furthermore, the trade deficit between US and China has been
so high because US has always refused to sell key military items and technology
to China as it will threaten their national security. Also, we have always
known that China has been lacking the “soft” skills, they are the world’s
manufacturer but most of their products are researched and developed in the US
and other countries. Therefore, I believe that China’s recent investment in
Europe holds a more significant reason, which is the hope to buy Europe Zone’s
technology and big airplanes (military) that they can offer. When China can stop
buying those equipments and make them instead, it will be the real superpower
because holding the biggest surplus and reserves does not make them a
superpower yet.
In relation to US-China relationship, I would say that their
relationship has always rocky since 1991 after the cold war ended. China is on
its way to overtake US as the world’s largest financial superpower and US is
feeling increasingly threatened. As compared to Japan back in the 1980s, Japan
was never considered going to overtake US simply because its population is half
of that of the US and in order for them to achieve that, their average GDP per
person will have to be twice as much as US in order for them to do so. In
contrast, China’s population is more than 4times that of the US. At the current
pace, China could well overtake US before the 2027 projection by Goldman Sach.
Therefore China is considered extremely threatening to US.
The recent quantitative easing by Ben Bernanke is a move I
would say to inflate away the debt to China (there are other reasons as well)
and China is not stupid to continue hold foreign reserves denominated in USD
(even Japan is buying up euro debt). Therefore the recent buying of Euro debt
is one the move by China to diversify its foreign reserves.
Next, the most frequent issues that US have always brought
about are that China should revalue their Yuan due their trade deficit. Due to US having an ACT that can impose trade
tariffs on countries that manipulate
their currency, China also does not want that to happen as they are heavily
reliance on US. China is still a developing country and their domestic
consumption is still not as strong. If China were to have a sharp revaluation
like what Japan did in the 1980s (Plaza Accord), I believe that China will
suffer a huge load because its current export make up about 23% of its GDP and
consumption only make up 38% (low). Therefore, by having a sharp revaluation to
the Yuan, it will cause their products to lose competitive advantage and soon
most of the manufacturing plants in China will move to cheaper markets like
Vietnam. There might be benefit to a revaluation of the Yuan such as increasing
domestic consumption when imported goods are cheaper, that’s why China is now
slowly letting their currency to increase slowly but definitely not sharply.
All in all, China will continue to depend US for export market and US will
depend on China to finance their debt.
Another issue that China is facing a problem with US is that
they are competing resources around the world. As China continues to rise, it
will threaten US in terms of the limited resources that the world can offer.
China has been gaining huge support from Africa and this has caused US to be
wary of China as no one wants their resources to be taken away from them. One thing positive for US is that US has been
successful in acquiring resources from the Middle East. Therefore, in order for
China to continue rise be the world’s superpower, it is also constantly
thinking of ways to acquire more resources and such actions are disturbing to
our current superpower, the United States (US).
Another significant issue that I would like to bring up
about the US-China relationship is history. To me, the Chinese has always been
at war. Take for example the recent Korean tensions; China will never want US
to have any military near its border to threaten China. The reason why this is
so simply dates back to the war time period such as the 8 armies’ invasion of
China. If US were to be truly open, they would have sold key military
technology to China long before this. Also, there are concrete reasons to
believe that US has a military airbase in Japan that contain nuclear warhead
that can reach China in 2hours, I said this because the recent showing of
military strength by China to have stealth airplane etc is to tell the whole
world that China is not to be pushed over. All in all, the US-China relationship has
always been rocky no matter in terms of political issues and economic reasons.
US being the current superpower will soon feel that China will be up and
coming.
However, another thing that China is currently is facing is
aging population. China has long implemented their one-child policy since 1972 after
the famine in the 1960s. China will soon face productivity issues as faced by
Japan as their population age rapidly.
I would like to conclude that China will become the world’s
superpower and the tension between US and China will only get stronger even
though they will need each other to attain that. The recent Euro debt issue is only
one of the many moves by China to attain the status of being a superpower.
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