We have entered one of those rare historical periods that is characterized by a shift in global hegemony from one great power to another.
The last such was between 1931 and 1945, and marked the end of Britain’s financial ascendancy and its replacement by that of the US. It might be argued that the Cold War represented a similar period, but that is a fallacy. The Cold War was an ideological struggle between two powers that were always hopelessly ill-matched.
This new period is marked by the rise of China and the decline of the US. Arguably the process started around a decade ago, but at that stage it was barely noticed, such was the West’s preoccupation with Sept. 11 and its after-effects. Indeed, the Bush administration was thinking in exactly the opposite terms: The world was entering a golden age of US global power.
ILLUSTRATION: MOUNTAIN PEOPLE
It is more appropriate, however, to date the beginning of the new era from last year. First, the election of President Barack Obama signaled a recognition by the US of the limitations of its own power and the need for it to cooperate with other nations.
Second, China has reached a point where it is now clearly prepared, on the basis of the advances of the last three decades, to assume a more active global role.
And third, the onset of the global financial crisis provides the context for the decline of US economic power and illustrates the extent to which it has become dependent on China for the continuation of its global financial hegemony.
Such periods of transition are profoundly unstable, deeply uncertain and fraught with danger. The world is fortunate — for the time being, at least — that it has an American president in Obama who is prepared to take a conciliatory and concessive attitude toward the decline of the US, and that it has a Chinese leadership that has been extremely cautious about expressing an opinion, let alone flexing its muscles.
The picture, however, is changing rapidly; indeed, this year has already witnessed a marked change in Chinese attitudes.
Ever since the late paramount leader Deng Xiaoping (鄧小平), the Chinese approach has been based on taoguang yanghui (韜光養晦) — hide one’s capabilities and bide one’s time. But a succession of statements and initiatives suggest that Chinese policy has now entered a new phase.
RECKLESS POLICY
Premier Wen Jiabao (溫家寶) expressed strong confidence at the Boao Forum in Hainan on Saturday that China was successfully weathering the effects of the global economic crisis. During his visit to Europe for the Davos meeting, he made clear that reckless Western economic policy, especially by the US, was responsible for the crisis. He also declared that China would not give funds to the IMF unless the latter was subject to major reform.
Later he expressed strong concern about US financial policy and its impact on the dollar, seeking reassurance that the value of China’s US treasury bonds would not be prejudiced. In a carefully staged run-up to the G20 summit, Vice Premier Wang Qishan (王岐山) set out a vision of a new monetary order, while most dramatically of all, central bank Governor Zhou Xiaochuan (周小川) called for a new global currency based on using the IMF’s special drawing rights, an idea immediately rejected by the US.
Meanwhile, a meeting of the finance ministers and central bank chiefs from China, India, Russia and Brazil that preceded the G20 summit called for greater voting rights for developing countries in international financial organizations.
This new assertiveness is finding other forms of expression in Chinese society. A new book by five nationalistic authors, Unhappy China, argues that China has no choice but to become a superpower. Published last month, it immediately shot to the top of the bestseller list. There has also been an intense public debate about whether the country should continue purchasing US treasury bonds, especially given their extremely low interest rate.
It is now abundantly clear that China is prepared to take an active and interventionist role in international financial affairs. Given that the global financial crisis is 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.
FULL-HEARTED
The rise of China and the decline of the US will, at least during this period, be enacted overwhelmingly on the financial and economic stage. China has now demonstrated that it intends to be a full-hearted participant in this process, and it is not difficult to predict some of the likely consequences: The G20 will in effect 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 emanated from Beijing so far, almost completely unforeseen, is the suggestion for a new global currency that might, in time, replace the role of the greenback as the world’s reserve currency. Whether or not such a proposal would ever see the light of day, or indeed work, given that reserve currencies have always depended on a powerful sovereign state, this nonetheless provides us with an insight into the strategic financial thinking that now informs the Chinese government’s approach. Clearly they recognize that the days of the US dollar as the dominant global currency are numbered. This would also, incidentally, signal the end of New York as the global financial center.
But this is only one side of the picture. On the other side is the growing role of China’s currency, which has so far attracted little attention. Although the yuan remains non-convertible, it is evident that the Chinese are seeking to progressively internationalize its role.
The Chinese government recently concluded a number of currency swaps with major trading partners, including South Korea, Argentina and Indonesia, thereby widening the use of the yuan outside its borders. It is also in the process of taking steps to increase the yuan’s role in Hong Kong. This is significant because of the latter’s international position. In addition, the government has announced its intention of making Shanghai a global financial center by 2020.
The likely longer-run trends, then, are perhaps not so difficult to decipher. The short term, however, in the context of a highly volatile financial climate, certainly is. The US dollar’s strength over the past couple of years remains something of an anomaly, given the catastrophic state of the US financial system. It would be a brave person who bet on the dollar’s strength continuing; it is much more likely that at some point its value will plummet.
Should that happen, then the dollar’s global position could rapidly be undermined and the need for more fundamental global financial reforms made more urgent. All of this would only serve to accelerate the decline of the US and the rise of China.
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