Wen Jiabao, China's prime minister issued an obscure warning to America to preserve control over its economy. No one ever tries to hurt its best customer. China will be the first to be ruined with collapse of the US $ and world trade. Political upheaval and unemployment by tens of millions is something they cannot afford. A prosperous US is key to a prosperous China.
The last time [year 1421] they became introvert and secluded because they felt the world had nothing to offer them, they ended up being an opium-infested country, and it took 500 years to come out of the big sleep. Half the world was in China's grasp, and the rest could easily have been, had the emperor so wished. But instead, China turned inward, as succeeding emperors forbade overseas travel and stopped all building and repair of oceangoing junks. Disobedient merchants and seamen were killed, and within a hundred years the greatest navy the world had ever known willed itself into extinction. The period of China's greatest outward expansion was followed by the period of its greatest isolation.
'China --- both the modern state and especially its imperial predecessor --- is usually portrayed as being isolationist, looking inward, shunning contact with other lands. There is undoubtedly a great deal of accuracy in that view. But China also has a tradition of seafaring and exploration of the outside world that goes back at least 4000 years. These two opposing philosophies --- on the one hand, the Confucian attitude of keeping China self-sufficient and isolated; on the other a desire to reach out for trade, profit, or mere curiosity --- have sometimes clashed throughout Chinese history.'
'On the 8th of March, 1421, the largest fleet the world had ever seen sailed from its base in China. The ships, huge junks nearly five hundred feet long and built from the finest teak, were under the command of Emperor Zhu Di's loyal eunuch admirals. Their mission was 'to proceed all the way to the end of the earth to collect tribute from the barbarians beyond the seas' and unite the whole world in Confucian harmony. The journey would last over two years and circle the globe.
Chinese have achieved today, uniting the whole world in Confucian harmony through free trade and generous sharing of it's saving. Global free market economic structure is exactly like a house of cards; it is maintained traditionally on the basis of respecting freedom of trade and incentive. Recent Chinese prosperity is a result of free world trade and continuity of US imports; in turn they deposit their earnings in TB's to support US consumerism.
The present deficit and import-export game is not a zero sum game, but a positive cycle; the US until the onset of this crisis remained the growth engine of the global economy with the aim of creating new markets, I call them 'global consumers' that adhere to the 'American way of life!' It is the equal lifting of all boats. The players in this trade cycle are engaged with each other respecting certain rules. Chinese enjoy their access to the free global trade without much impediment, the west imports price stability and exports its non-productive industry to nations where labour is cheap.
Of course, if the Chinese did seriously cut back on their purchase of US debt, that could be a real problem for the American government - which might have to sharply raise interest rates or thrust the printing presses buttons.
The world mass poverty and basket case inequalities could not have been addressed without this 'imbalance' of trade surpluses and consumerism binge. The historical and unprecedented transfer of capital from West to East without conflict is an outstanding global event not recorded by many as a foremost recent event that ensured the change of course of human economic history. Yes, deficits have been disastrous, yet US have achieved for posterity the access to global markets and have been able to open the whole world to ideas of free competition and incentive.
The basket case poverty of BRICs is a distant reality. Colonialisation of the past was a result of 'island nations or sea-faring nations' using their naval advantage of heavy guns and ships to create markets through subjugation of colonies and treasure troves of commodities. In this age, free trade has achieved that. The West helped the East to create savings and these savings are today helping the West to come out of the crisis, it is in the interest of the East to continue to do that.
Wen Jiabao realizes full well that this delicately poised global economic house of cards shall collapse to the detriment of everyone if one player starts to dictate his will. US consumerism in this transitional stage post-1970 era, where part of the world was 'poverty struck' and the other quite rich, has been instrumental in helping to formulate global trade which has shifted capital to the have-nots by shifting 'heavy industry,' and created intellectual property rights which ensures that the newly acquired wealth of the have-nots will continue to circulate within the system. Prosperous people take holidays, eat higher level of calories and help create a market for service and knowledge-based economies. Global trade is not based on beggar-thy-neighbour politics.
The US capital market accounts for nearly 50% of the world's capital market and the dollar accounts for 60% of world currency reserves, there are hardly any alternatives for anybody to invest anywhere else securely. Anxious investors are looking with new passion for "shelter in wellbeing" in the form of American government obligations. So far, there are very few triple-A securities accessible.
Chinese remarks may have some political overtures so as increase her leverage before the London G-20 and counterbalance some criticism from the US treasury on China's manipulation of its currency. Beijing is trying to augment its influence at the meeting by striking a chord with its partners of its responsibility in financing U.S. spending. "Without China's buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment," he said. "By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting."
In straightforward remarks on the knotted character of US and Chinese finances, Wen said he is "worried" about Beijing's holdings of American government debt. China has $1trn (£716bn) of US treasury bills in its coffers, implying a subtle equilibrium between two countries whose fortunes are interlinked. "Inside China there has been a lot of debate about whether they should continue to buy Treasuries," said Frank Gong, chief China economist for JP Morgan. Washington needs to maintain selling treasury notes to fund its $787bn stimulus package.
It is naive to assume that Chinese or Aseans will withdraw their funds from US; the liquidity arising from such withdrawals has no place for parking. In the past just before the overheating crisis was a challenge that Chinese were facing. Now if they go for infrastructure improvement by withdrawing their reserves within their boundaries, such a massive undertaking would yield excellent results for world trade and Chinese trading partners would love to see that.
Political and economic constancy is the key for The Communists to stay in power. Today China's biggest challenge is unemployment; the government key worry is providing jobs. Chinese government estimates 24 million new urban jobs every year, only 12 million are available every year. Steadying the out-of-work rate is China's top precedence as the resilience-oriented Communist Party seeks to head off protests it fears could threaten its rule. It is their acceptance of the 'free economy' since Deng, that memory of the 'great leap forward' and Cultural Revolution which crippled China under Mao's rule has been diffused.
Now, what happens to America when it can't borrow the money? The Chinese shall be the first victims of an enormous collapse of world trade and US $. It is not in their interest to hurt US, their largest trading partner. It is the spending habits of their best customer that they have such riches. A huge foreign treasury reserves is a windfall that has helped China maintain a global posture of emerging economic power and kept a lid on indigenous popular uprising. Any sovereign fund manager knows well that their biggest quandary is parking of excess funds. It is not the returns but preservation of wealth that is the key element. Where else could the Chinese invest their money? Repatriation of a trillion £ would damage $ in no uncertain terms nonetheless shall create massive unemployment globally, and world trade shall be the first victim; it is in no one's interest that this cycle of prosperity comes to an end.
The 'mother of all exports' and the strongest of all commodities is 'The American way of life,' this way of life helps consumers to exchange their oil and gold with Burger, IPods and intellectual property. As far as America stays in front of patent registration and intellectual propriety and keeps its productivity high, $ will be stable.
The new riches bring new habits: of films that are made in Hollywood; the need of keeping in universal contact that is fed by the coalition of AAPL-MFST-INTC-DELL and CSCO; the basic requirement to feel healthy and remain healthy that is fulfilled by pharmaceuticals that are predominantly American; the best cocktail for Aids is not made by Europeans, or from Alzheimer's to Parkinson to ordinary blood pressure, the intellectual property rights and innovation rights are owned by US companies. The new acquired 'richness' of the old poor nations of the east are inflicting on them US habits, life style and similar health problems, and for that, once new consumers with massive appetite are being added, I see no threat of so-called unsustainable phenomenon of financing the deficit.
The wave of new American habits-loving consumers sadly for me, appear no where on any economic pundit studies! They might abuse Americanism every day in the Middle East over super big cups of Starbuck coffees, but hating America is only fun talk, living the style is walking-the-talk. For me, IPODS and Burgers are new gold of this new age. Nations devoid of global brands and patents and rich with commodities have no future; it is the exchange value of goods that matters in this new world.
New Chinese and emerging nouveaux riches in the sub-continent are styled in unabashed US consumerism. This is a huge market outside the US, in the region of billion people, who depend on US products like Starbucks for their coffee and big Mac for their lunch. Sushis are out and US empire has done what no one else has ever done – created a billion new consumers without taking their retirement responsibilities. The trade deficit is a big plus as far as new outposts keep creating new global frontiers where American way of life is the way to go. From Tiananmen Square to Red Fort in Delhi, the 400 million plus new middle classes just in these two countries are going to become the next baby boomers. No one but American exporters of services, medicines and food will benefit from this huge rise of an affluent middle class in China.
The fact is that US deficit is a small price in terms of keeping world economies growing, but the real goal that is not appreciated is that all these are adding to a new consumer class that underpins future US economy. The US deficit is the most intelligent policy ever devised by any global empire; it emerged out of natural selection because freedom and hopes for better life is a way we all want to adopt.
I believe in the concept of supremacy of the 'Empires of the Sea.'* It is as gripping a concept today as it was in medieval times. Reclusive policies rarely work; impressive nations are nations whose business has been conquering seas, nations who refused to take to seas remained stagnant. China was one that remained stagnant in the past, its unique lead in print, paper; iron ore, science all was lost to introversion.
In the end I will offer Wen Jiabao a piece of history that may carry some weight. China is at a vital cross road today, it is today world largest container ship sea faring economic power, and it can help build a firm global economy from the vestiges of this crisis by continuing inclusive policies instead of exclusion.
After the death of Zheng the introversion of China cost Ming dynasty dearly. Yongle's moving of the capital from Nanjing to Beijing was largely in response to the court's need of keeping a closer eye on the Mongol threat in the north. Land based threats and strategies took most of the funding. The revival of Mongol power on the northern steppe diverted a colossal amount of funds to build the Great Wall after 1474.
'When Emperor Zhu Di's loyal eunuch admiral Zheng returned Zhu Di lost control and China was beginning its long, self-imposed isolation from the world it had so recently embraced. The great ships rotted at their moorings and the records of their journeys were destroyed. Lost was the knowledge that Chinese ships had reached America seventy years before Columbus and circumnavigated the globe a century before Magellan. They had also discovered Antarctica, reached Australia three hundred and fifty years before Cook and solved the problem of longitude three hundred years before the Europeans…'