By Alexander Friedman: ZURICH – The
twenty-first-century economy has thus far been shaped by capital flows
from China to the United States – a pattern that has suppressed global
interest rates, helped to reflate the developed world’s leverage bubble,
and, through its impact on the currency market, fueled China’s meteoric
rise. But these were no ordinary capital flows. Rather than being
driven by direct or portfolio investment, they came primarily from the
People’s Bank of China (PBOC), as it amassed $3.5 trillion in foreign reserves – largely US Treasury securities.
The
fact that a single institution wields so much influence over global
macroeconomic trends has caused considerable anxiety, with doomsayers
predicting that doubts about US debt sustainability will force China to
sell off its holdings of US debt. This would drive up interest rates in
the US and, ultimately, could trigger the dollar’s collapse.
But
selling off US Treasury securities, it was argued, was not in China’s
interest, given that it would drive up the renminbi’s exchange rate
against the dollar, diminishing the domestic value of China’s reserves
and undermining the export sector’s competitiveness. Indeed, a US defense department report
last year on the national-security implications of China’s holdings of
US debt concluded that “attempting to use US Treasury securities as a
coercive tool would have limited effect and likely would do more harm to
China than to the [US].”
To
describe the symbiotic relationship between China’s export-led GDP
growth and America’s excessive consumption, the economic historians
Niall Ferguson and Moritz Schularick coined the term “Chimerica.”
