Heads up world, China is on the prowl

The lions do it. The monkeys do it. The peacocks do it. People do it. So, why shouldn't countries do it?

Well, actually, they do.

In the 19th century, it was Germany and Japan that challenged the entrenched might of Britain and in the 20th century, it was Russia.

In the 21st, it will be China that challenges the mighty US, says Arvind Subramaniam, a young economist with the Peterson Institute for International Economics in Washington who is also a prolific writer and was recently counted amongst the important thinkers of the world.

To prove his point, he has written a book in which says the world will have to “live in the shadow of economic dominance” by China.

We have two clever qualifiers there already: only a shadow and only economic.

It is a comforting thought: even if it happens, it will only be a shadow.

Another comforting thought is this: undemocratic challengers bite the dust. Germany, Japan and Russia had everything that Britain and the US had, except for democracy. So, China needs to look sharp.

And therein lies the problem: if it becomes a democracy it will lose its comparative advantage of squeezing the surplus out of labour, the key Marxian formula for economic success.

Clever formulation

Subramaniam, however, doesn't quite see democracy as a threat to China's juggernautic progress. But how would he know? China's never been a democracy.

That said, one must quote Dani Rodrik, the Harvard professor who says in endorsement, “Eclipse is a fascinating read. Controversial, but meant to be, it has the potential to set the terms of our ongoing discussion on what is perhaps the hottest issue in the global economy — China's role. Its quantification of power alone will attract considerable interest.”

To which I must add: it is also a very cleverly written book. Subramaniam argues the case for what might happen; but he never says that it is bound to happen.

It's a heads up, in other words, especially for the US, which is going to be the major loser if it doesn't watch out.

Subramaniam clucks fussily that Americans think that their economic pre-eminence cannot be seriously threatened.

He cites a speech by Larry Summers to this general effect who reminds us what a former CIA director, Allen Dulles, referring to the Soviet Union had warned against in 1959, namely, that America's “largest competitor, that industrial growth rates of eight or nine per cent per year for a decade would dangerously narrow the gap between our two countries.” Other Anglo-Saxon economists, it turns out, have been saying the same thing.

You don't say!

Subramaniam says don't be silly, you chaps, let me quantify it for you – and he does a rather super job of it. I was reminded of a visit to the doctor whose tests reveal everything is wrong with you even though you are feeling fit as a fiddle.

So he concludes that “the economic dominance of China relative to the United States is more imminent, will be more broad-based and could be as large in magnitude in the next 20 years as that of the United Kingdom in the halcyon days of empire or the United States in the aftermath of World War II.”

On the other hand, none of this may happen for a very simple reason: China is not an open society and doesn't have what it takes to build new things. It can copy well, just as Japan could, and maybe improvise a little. But can it match the sheer inventiveness of England and America? Forget it.

But that is my view. Subramaniam believes that lots of output accompanied by lots of trading alone will make Chinese economic dominance inevitable.

Renminbi ahoy!

He also thinks that “China's growing size and economic dominance are likely to translate into currency dominance”.

The calculations, as well as a new reading of the history of the transition from sterling to the dollar, suggest that the renminbi could surpass the dollar as the premier reserve currency well before the middle of the next decade” and further that “The key finding is that size — in terms of GDP, trade, and external finance — is the fundamental determinant of reserve currency status. These variables explain about 70 per cent of the variation in reserve currency status of the major currencies over the last 110 years.”

Maybe it will. But probably not. It took 70 years to dethrone the sterling. But that was not all that it took. In those 70 years, there were two World Wars as well.

It was the resulting destruction, rather than expanding German and Japanese production and trading that pulverised Britain – which quickly re-invented itself as the world's second most important financial capital.

My view on the renminbi becoming the world's reserve currency is based on a simple question: will the world trust the Chinese communist party?

I think not, my lords.

Excerpt

“…the managing director has insisted that, to reassure the financial markets of the credibility of the IMF loan-cum-conditionality February 2021. It is a cold, blustery morning in Washington. The newly inaugurated Republican president of the United States is on his way to the office of the Chinese managing director of the International Monetary Fund (IMF) to sign the agreement under which the IMF will provide $3 trillion in emergency financing (about 12 per cent of GDP) to the United States and the conditionality to which the United States will have to adhere…

“Rumors are swirling in global financial markets that China is planning to wield its financial power because it can no longer countenance substantial US naval presence on the Indian and Pacific Oceans.

“The dollar is under intense pressure and China has reinforced that pressure by selling some of its $4 trillion worth of reserves. The dreaded dollar collapse is imminent…The IMF seems the only option left.

“The presidential motorcade reaches the plush IMF headquarters, but the leader of the free world has not arrived alone… Because the elections of 2020 resulted in divided package, US congressional leaders of both parties be present…

“China now has veto power at the Fund and makes the removal of US naval bases from the Western Pacific a precondition for the United States to receive the financing necessary to make its debt dynamics sufficiently stable to satisfy bond markets…

“The president grimly accepts. It is eerily reminiscent of 1998, when with arms crossed and smug expression, West-embodying IMF Managing Director Michel Camdessus watched as Indonesian President Suharto signed off on an IMF program and, in the eyes of Asia, signing away sovereignty and self-respect.

The handover of world dominance is complete.”

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