When China Rules the World

But all this lies some way off. For the time being, the world is preoccupied by the onset of the biggest recession since the Great Depression. At the time of writing, the consequences of this remain unknown. Depressions are a bit like wars: they test societies in a way that normal periods of prosperity and growth do not. They reveal weaknesses and vulnerabilities that otherwise remain concealed. They give rise to new political ideologies and movements, as the world learnt to its great cost in the interwar years. On the face of it, China is much better equipped to deal with this crisis than the West. Its financial sector is in a much superior condition to that of the West, having avoided the hubristic risk-taking that hobbled the Western banks; nor is China confronted with the kind of de-leveraging which threatens deflation and a major shrinkage of demand in the West and Japan. While the developed world faces the prospect of shrinking economies for perhaps two or more years, China is still looking forward to considerate growth, albeit of uncertain magnitude. The unknown for China is the effect that a growth rate which falls below 8 per cent, perhaps to 6 per cent or much lower even, would have in terms of unemployment and social unrest. This will prove to be by far the biggest test Chinese society has faced since 1989. The world is entering a new political era. Despite regular Western warnings that the Chinese model was unsustainable and needed to be Westernized, the financial crisis in 2008 marked the demise of neo-liberalism and the failure of the Western free-market model as practised since the late seventies: the Chinese rather than the Western approach has been affirmed. [1337] At the same time, the departure of George Bush and his replacement by Barack Obama has kindled enormous global interest, not least in the developing world, which should serve to increase the standing of the United States in the eyes of many. But it is the effect of the global recession that is likely to have the most serious impact. If China continues to grow at 6-8 per cent and can avoid debilitating social unrest, while the Western economy enters a period of negative or near zero economic growth, then the global recession is likely to significantly accelerate the trends discussed in this book and result in an even more rapid shift of power to China.

It has become evident that China is prepared to take a more proactive and interventionist role in international financial affairs. Given that the global financial crisis is presently at the top of every agenda and that reform of the existing global financial order is now irresistible, this has far-reaching implications: China will be a central player in whatever new architecture emerges from the present crisis. This represents an extraordinary change even compared with two years ago, let alone five years ago, when China was not even included in discussions on such matters. But it also has a much wider significance. The rise of China and the decline of the United States will, at least during this period, be enacted overwhelmingly on the financial and economic stage. And China is demonstrating that it intends to be a full-hearted participant in this process. It is not difficult to predict some of the likely consequences: the G20 will effectively replace the G8 and the IMF and the World Bank will be subject to reform, with the developing countries acquiring a greater say.

The most audacious proposal that has so far emanated from Beijing is the suggestion for a new de facto global currency based on using IMF’s special drawing rights, which might in time replace the dollar as the world’s reserve currency. Whether such a proposal would ever see the light of day, or indeed work, given that reserve currencies hitherto have always depended on a powerful sovereign state, it offers an insight into the strategic financial thinking that informs the Chinese government’s approach. It suggests that the Chinese recognize that the days of the dollar as the dominant global currency are now numbered. At the same time, the Chinese government is actively seeking ways to progressively internationalize the role of the renminbi. It recently concluded a number of currency swaps with major trading partners including South Korea, Argentina and Indonesia, thereby widening the use of the renminbi outside its own borders. It is also in the process of taking steps to increase the renminbi’s role in Hong Kong, which is significant because of the latter’s international position, and has announced its intention of making Shanghai a global financial centre by 2020. There are, thus, already strong indications that China ’s rise will be hastened by the global crisis.

Appendix – The Overseas Chinese