By Michael Richardson
IN HIS latest book, The Ascent Of Money, historian Niall Ferguson describes the emergence of a new post-Cold War superstate. Called Chimerica, it is a fictional combination of China and the United States.
'For a time, it seemed like a marriage made in heaven,' he writes. 'The East Chimericans did the saving, the West Chimericans did the spending.' The Easterners (in China) benefited from export-oriented economic growth; the Westerners (in America) from cheap imports.
As part of ChiAsean, South-east Asia has been selling raw materials, semi- processed goods and industrial components to the now fast-slowing Chinese economy. In return, South-east Asia gained a major boost to domestic growth and increasing amounts of Chinese investment. It, too, has big stakes in the health of Chimerica, since the US is a huge market both for China and for Asean.
Will the bond of mutual interest between the US and China survive the global financial turmoil? A few weeks ago, Mr David McCormick, US Treasury Undersecretary for International Affairs, said that Beijing had been 'a responsible participant and ally' in dealing with the crisis. US Treasury Secretary Henry Paulson was in Beijing last week, heading a Cabinet-level team of US officials in talks with their Chinese counterparts on how to continue bilateral cooperation in these difficult times.
But with US President-elect Barack Obama due to take over next month, there is no assurance that the twice-yearly meeting of the US-China Strategic Economic Dialogue, established by the Bush administration in 2006, will continue. During his presidential election campaign, Mr Obama accused China of keeping its currency artificially weak so as to expand exports and dampen imports.
At around the same time that Mr McCormick was praising China, Russian Prime Minister Vladimir Putin was urging Beijing to jettison the dollar in favour of national currencies in bilateral trade. The appeal appeared to leave his visiting Chinese counterpart, Mr Wen Jiabao, unmoved.
China's bilateral trade in goods with Russia was worth almost US$43 billion (S$65 billion) in the first nine months of this year. It was dwarfed by the US$305 billion in trade that China transacted with the US in the same period.
Over the past couple of decades, China's accumulated trade surpluses, particularly with the US and Europe, have helped it amass the world's biggest foreign exchange reserves, around US$2 trillion. Some analysts calculate that China has invested from US$1 trillion to US$1.5 trillion of its reserves in US debt securities, including debt issued by Fannie Mae and Freddie Mac.
Indeed, it was significant that in bailing out these two distressed mortgage giants in September, the US Treasury was careful to ensure that their bond-holders like China would not suffer - unlike their shareholders, many of them American regional banks.
China's role as creditor to the US was underlined by US Treasury figures released last month. They showed that China overtook Japan in September to become the largest owner of Treasury bonds, bills and notes, with US$585 billion of these securities. The dollar has been strengthening against other major currencies, except the Japanese yen, in recent months as investors repatriated money to the US. This has added lustre to China's dollar-denominated reserves.
Chinese credit in exchange for access to the US market - this is the unwritten compact between Beijing and Washington. 'As long as China wants to keep its exports to the US strong, it must recycle the trade surplus back into the US,' says professor of finance Michael Pettis at Peking University's Guanghua School of Management.
'It is a symbiotic relationship that is unlikely to change anytime soon.'
So mutually-dependent are the two economies that recent research by Citigroup found that if the US slowed by 1 per cent, China would slow by 1.3 per cent. Mr Derek Scissors, a research fellow in Asia economic policy at the Heritage Foundation in Washington, casts this mutual dependence in even more dramatic terms.
He agrees that America's increasingly lavish borrowing would be expensive without China's help. 'Against that, our trade deficit with China was the equivalent of 6.5 per cent of China's gross domestic product through September. China is helping us try to avoid a 2 to 3 per cent decline in GDP in 2009 and 2010; we are enabling them to avoid a 6 to 7 per cent decline every year.'
China and the US, it seems, are like conjoined twins. They can only be separated by extremely complex surgery that may result in the death or severe disablement of one or both of them.
Chinese officials and analysts suggest that China will retain, and probably increase, its holding of US Treasury securities for the foreseeable future, provided it is confident America will recover from the credit crunch and recession. However, the crisis has prompted Beijing to rethink how best to manage its reserves and economy in the future.
Expanding domestic demand and reducing reliance on exports are likely to be hallmarks of any new regime. Shocked by the sudden storm of adversity, China will not want to be so heavily dependent for its economic health on any one country again.
The writer is an energy and security specialist at the Institute of Southeast Asian Studies.
[This has been stated before. China is basically financing the US consumer society. It acts like a merchant giving the US credit to buy the products it makes. This has the potential for a future crisis - either economic or politico-military. Because what happens with consumers defaulting on their credit payments is that the bank comes in can seize the collaterals.]