China engages with the financial houses of the West

By Luke Prescott

On the 14 of September, Chinese Premier Wen Jiabo strongly criticised the West and signalled a reluctance to bail out Eurozone countries struggling to halt the spread of the Eurozone crisis: “countries must first put their own house in order”. He was speaking to an audience of business leaders at the World Economic Forum in Dailan, China. 

It could be easy to assert that the recent and uncharacteristic outbursts of the Chinese Premier and of Chinese state media over developments in both the Eurozone and the United States are indicative of a belligerent China attempting to embarrass its ‘dangerously irresponsible’ Western trade partners.

The now famous editorial from Xinhua, the press arm of China’s ruling Party, has suggested that China, along with the rest of the world, has been ‘kidnapped’ by domestic squabbles in Washington over the debt ceiling debate; “Such political brinkmanship is irresponsible, for it risks, among other consequences, strangling the still fragile economic recovery of not only the United States but also the world”. A fair point many might say, but such rhetoric from both the Premier and Xinhua is antagonistic language that rarely emanates from China, and the resulting media attention is indicative of how uncharacteristic the increasingly brash display of frustration was.

China rarely gets dragged into international disputes, and it is difficult to recall a time when China has opened up to the world its views and interpretations of events in the West. This is due to China’s philosophical approach to foreign relations; it allows itself breathing space on the world stage with a pragmatic approach to any world event. Indeed, China is usually at its most vocal when deflecting criticism from the West over the handling of what China regards as internal issues. Rhetoric of late however, could be seen as reminiscent of the USSR of the 1950s, indicative of an over-confident state preparing to take the reins of the world economy from the United States.

With even robust capital controls failing to put the brakes onto the Chinese economy, the world has been watching and worrying as China grows at a pace similar to Soviet growth in the 1950s and 60s, and Japanese growth during the 70s and 80s. However, rhetoric emanating from China on increasingly larger platforms for such a reason is incredibly out of character. So why is China speaking out now? And why so loud?

China has, in a sense, graduated economically within a globalised economy, a process that has reached full completion over the past decade. It would be easy to say that China’s growing critical assessment of the spreading Eurozone debt crisis and the bungling of the United States’ increase of its debt ceiling would be frustration at being forced to watch its biggest customers and drivers of wealth idly becoming cash strapped. However, a closer look at China’s own internal worries is more revealing when explaining this uncharacteristic war of words.

Recent history has shown that a globalised economy allows a single state economy access to uninterrupted growth as its inflationary burden can be shared and absorbed by the world economy. We’ve seen this in Clinton’s most praised achievement of overseeing the longest period of peacetime economic growth America has ever seen, and closer to home, with New Labour overseeing an incredibly long and uninterrupted period of growth; the so-called end of ‘boom and bust’.

Rising inflation reduces the power of a currency, in essence, an erosion of purchasing power. The inevitable bust periods that followed the booms seen in the 70s and 80s were characterised by high inflation. This was because states growing in the pre-globalised world had to absorb single handedly their own inflationary pressures.

In a globalised world, the inflationary side effects of growth are no longer concentrated on a single economy, but of the world economy, which has a much greater capacity to absorb these pressures. China has thrived under these conditions, and has availed itself of its old market and capital controls to let growth flourish, confident in its reliance on the strength of the globalised economy to absorb its own inflationary pressures, leaving room for its seemingly unshakable growth.

But China is worried: sluggish growth and financial crises in the West are reducing the capacity of the globalised economy to soak up the inflationary pressures. China, with its manipulation and deliberate devaluation of its own currency in an effort to increase its export market, is especially vulnerable to inflation and history has taught China to be wary of it.

Both the Chinese Civil War and the Tiananmen Square protests have shared origins in period of starvation and lack of food availability. In order to export and drive its own economy, China has consistently kept its currency weak in order to make it cheaper for the world to shop there than some of its neighbours and competitors, and the resulting and inevitable built-in inflationary pressures have in great part been absorbed by the globalised economy. In essence, China was confident it could grow and develop quickly to become rich before it becomes aged off the back of its export market without the threat of food prices reaching levels high enough to cause disorder.

It is telling then, at how quickly the currency wars of 2009-2010 ended, after being cited by a plethora of economists and politicians in op-eds the world over as a major threat to world economic recovery. Manipulation and devaluation of the Yuan by capital controls in China, and the liberal use of quantitative easing on both sides of the pond were indicative of the currency wars, as East and West tried to boost growth off the back of export markets.

In the end, the Arab Spring (a trigger of which was rising food prices), was enough for China to decommission its own weapons of currency devaluation as it became paranoid that rising food prices could lead to unrest. The swift action of China illustrates its paranoia when it comes to food prices, preferring to stabilise them rather than giving in to demands for continued growth. On September 14th, Premier Wen compounded this policy shift, stating that China can contribute to global recovery by ensuring ‘steady growth’ at home.

With China now so exposed to food price inflation (trading off its own ability to regulate internal prices for economic development), it is not unexpected that it would criticise so strongly the West, its frustrations clearly spilling out at the indecisive and slow acting governments as both the US and the EU struggle to get their respective financial houses in order.

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