Great leap into the unknown
bday.co.za
CHINA AND THE US/Michael Power
SHE gives teeth to that term "man-eater", does Mrs Praying Mantis. First she seduces her mate into impregnating her with the next generation. Then, once he has finished the job actually sometimes while he is still on it she returns his favour by eating him alive.
This image comes to mind when I look at the bizarre relationship developing between the US and Chinese economies. Not only is USA Inc leading the global rush to inject China with the capital seeds of the next generation, but America's spendthrift citizens are also making a daily deposit of $500m via the bilateral trade deficit. Naturally, China has become heavy with foreign exchange reserves $514bn at last scan.
If my metaphor is right, how long will it be before those Mandarin mandibles go to work on the US? And when will Mrs Mantis, forever wearing black out of respect for her late dear husband, retire to her Confucian confinement and give birth to the next economic hegemon?
To answer these questions, it helps to think of China as having connected to the capitalist world in 1979, when Deng Xiao Ping abandoned the thoughts of Mao. China's billion-strong population, innocents abroad in noncommunist territory, declared themselves willing to work for what the west disparagingly dismissed as "starvation wages".
Twenty-five years later, China's dollar wage rate still remains low. In interior Chongquin, a semiskilled worker can expect to be paid $0,6 an hour, less than 5 a day or $1300 (R8000) a year. A typical factory worker in Johannesburg earns about $5200 a year, about four times this amount. Few would disagree: Chinese labour is cheap or perhaps, just perhaps, is it that most of the rest of the world, SA included, is expensive?
During the 1980s, Deng Xiao Ping forced China's entry into the global economy. Trade with the rest of the world exploded and the Chinese economy endured a roller-coaster ride, though at least these ferocious cycles were built up on a secular gross domestic product (GDP) growth rate of 8%. Not until the country hit extreme turbulence around 1990 when GDP growth declined from 11,3% to 3,8% over two years and inflation peaked at 24% were the Chinese forced to review their strategy for economic take-off.
Their rethink smashed the generally accepted principles of economics. Having connected with the capitalist world in 1979, China went whole hog in 1994 and tied the yuan at 8,28 to the dollar, effectively making China an "economic 51st state" of the US. By doing this and maintaining domestic capital controls, they committed the cardinal economic heresy as to how nations joining an Organisation for Economic Co-operation and Development- dominated, globalising economy should behave.
Yet, given China's priorities, the rationale was faultless: with the 1980s boom having triggered an exodus of jobseekers from the rice paddies of the interior to the factories on the coast, China's imperative was to create 10-million new jobs every year. Beijing reasoned that a fixed exchange rate with the dollar would achieve this. And the spectacular achievements of the decade since have proved it right.
But this Great Leap Forward That Actually Worked only tells half the story in the past two decades, the US has been the yin to China's yang. And, in the process, China has also become the US's nemesis by finding a way of undermining the seeming impregnability of the modern-day Troy. But their Trojan Horse took on an even more innocuous form than did that gift from the Greeks.
Its shape? The shopping mall. Think Wal-Mart. Via these suburban barns, China launched a thousand container ships and invaded the US with stuff. Lots of stuff. And I mean lots and lots and lots of stuff from toys to clothes, from electronic gadgets to wheelbarrows, from furniture to computer hardware.
To haul their Trojan Horse inside America's walls, the Chinese enlisted the aid of an unwitting antihero: Joe SixPack. The latter obliged by having a ball in China's shop, buying stuff in increasingly large quantities using increasingly larger amounts of credit in an attempt to sustain his increasingly illusory lifestyle.
Why illusory? Because all the time Joe's job was becoming Jiang's.
Since 1994, Chinese stuff has eroded the manufacturing base of the other 50 states that belong to this one-sided currency union; think of it as death by a trillion price cuts. The corollary is that the US current account deficit has ballooned to $600bn a year, a growing proportion being hoarded in US treasury bills at the People's Bank of China.
In English history, King Ethelred the Unready failed to turn back a tide of invading Vikings, even after bribes of gold. His usurper, Canute, proved that even if kings commanded waves to stop, they could not halt the elemental tide.
Today, a financial tsunami is forming in the Pacific. For now, the US is throwing T-bills into it, bribing the swelling tide from coming in. But for how long will their ploy work? In the 19th century, history's tide swept from west to east, and a humbled China was force-fed opium by outsiders. But today that tide is ebbing, and a new one is flowing. With poetic justice, we can now think of China as America's "opium" supplier and Joe SixPack as the addict. What sweet revenge!
Here is one possible ending to this unfolding drama. For now, China feeds the US's habit by offering it hits on credit, a religion that has become the new opium of the American people. This anaesthetises them so effectively that they cannot see what is coming.
Playing dumb, China accepts US Federal Reserve chairman Alan Greenspan's greenbacks and perpetuates the illusion that this game of Chinese cheques is actually a symbiotic relationship that suits both parties. But eventually China breaks cover and the US's tide comes in.
In the wake of this tidal wave, the largest vendor-financing scheme in history gets washed away. A rout in the US bond market ensues, US interest rates rise sharply and the dollar dives. China declares itself fed up with the Fed's incontinence (not to say incompetence) and lets its currency float free. The ensuing yuan appreciation speeds up the process by which China becomes the world's economic hegemon.
The US's tragedy probably won't follow this script, but stranger things have happened. Remember the one about a wooden horse that brought down the America of its day? The Turks do. To this day, they say ruefully: "Beware the Greeks when they come bearing gifts."
With the Olympic torch now en route from Athens 2004 to Beijing 2008, will it carry within its flame fleeting images of Greece's glory? And will China, by staring into this Greek fire, glimpse the power it now possesses?
Might we yet hear that Chinese whisper: "Arise, Asia. Your century is nigh? "
Power is a strategist at Investec Asset Management. |
