China is one of the big themes of the moment, as it will be for some time to come. For the most part, the western authors turning their thoughts to the question of what China's rise implies for America and Europe are rather pessimistic. I've just finished an interesting and nuanced take on this theme by Stephen Cohen and Brad DeLong, The End of Influence: What Happens When Other Countries Have the Money.
They don't predict absolute American decline or immediate disastrous consequences of Chinese growth. However, they have written an interesting reflection on the way American spending and Chinese lending have locked the two countries in an economic embrace which will prove both uncomfortable and long-lasting. A secondary theme is the inevitable adverse impact of the loss of economic power on America's 'soft power', its wider cultural influence and the seeming desirability of the American way of life.
The book starts by exploring the role of sovereign wealth funds in general, including China's massive investments in US assets. The western economies have been in recent decades reasonably relaxed about foreign investments in their companies and infrastructure as well as government bonds. The 1980s were the last time there was great anxiety about foreign investors. However, when investors take the form of government-owned funds which might not be pure returns-maximisers, that attitude is bound to change. “Truly great piles of US obligations are in the hands of the governments of Asia,” they write (p22). Japan has $1 trillion, Taiwan, Hong Kong and Singapore together $500bn, Korea $200bn, and China $2.5 trillion in its reserves. In the latter case, China's holdings of US assets are about $20,000 per US household – and three quarters of China's GDP. This could not be either repaid or divested in any short time period. So the nub of the argument lies in this fact: “Neither side can walk away; we're locked.”
The book interestingly puts the blame for the why neoliberal delusions about global financial markets went so badly wrong mainly on central bankers. The authors argue that while the west came to disown the idea of industrial policy, and emphasised the role of markets, an exception was made in the case of finance. Central banks had great powers to shape the economy in ways that favoured the finance sector. They call central banks “this immense island of central planning”, which sets interest rates and has power of life and death over financial institutions.
The economic worldview which prevailed “carried with it a cultural content of the primacy of finance …., of new business practices and styles, and of celebratory income inequality on the consumption and lifestyle side. Until it crashed, this American view was willingly adopted by more and more people and governments around the world.” (p57)
In contrast, China has operated an industrial policy, the most successful possible kind, a low exchange rate. The authors argue that this is better than the 'picking winners' variety, and it's impossible to deny its success in transforming China on a huge and rapid scale. It also depended on America acting as importer of last resort for China and other Asian countries. This can't continue – China can't continue to pile up US dollar reserves which couldn't ever be repaid. Nor can it lightly see the dollar decline, devaluing its existing reserves. It will seek, the book predicts, to turn the financial assets into real assets. The encounter between the Chinese and American states is not likely to be a comfortable one.
Money is power because it has cultural sway. America's having so much money for so long made it culturally confident and pre-eminent for over a century. This is changing now, Cohen and DeLong argue. Another new book predicts China's authoritarian approach will set the model for the next century. Stefan Halper's The Beijing Consensus was reviewed in the Financial Times this weekend. The subtitle encapsulates the thesis: How China's Authoritarian Model Will Dominate the 21st Century. The blurb says:
Instead of promoting democracy through economic aid, as does the West,
China offers no-strings-attached gifts and loans, a policy designed to
build a new Beijing Consensus. The autonomy China offers, together with the appeal of its illiberal
capitalism, have become the dual engines for the diffusion of power away
from the West. The Beijing Consensus is the one book to read to
understand this new Great Game in all its complexity.
Reviewer Gideon Rachman praises it although suggests it over-states the previous degree of buy-in to the Washington Consensus. He also argues that the co-ordinated power of the BRIC countries is more of a threat than China's investments in Africa to US economic interests.
There are plenty of other books on China at present. In my pile but not yet read is Awakening Giants: Assessing the Economic Rise of China and India by Pranab Bardhan. I'll review it soon – the compare and contras between the two Asian economies seems potentially fruitful.
I've also been reminded by Charles Dumas of Lombard Street Research about his 2006 book with Diana Choyleva, The Bill from the China Shop. With hindsight it looks very prescient. It was favourably reviewed in the SBE journal.
Brad DeLong's website has links to other reviews of their book.
