Last week, after China announced its massive stimulus plan, including a massive fiscal stimulus and a withdrawal of Rmb4 trillion ($591 billion) of currency reserves, the stock market on both sides of the Pacific leaped. Long a major driver of the global economy, the stock market should also benefit from Beijing’s China-U.S. trade war and easing of the global debt crisis in emerging markets.
However, it is important to note that China may overshoot its fiscal stimulus plan to preserve its currency stability and slow the economy. For one, global debt is surging, not shrinking. European sovereign debt, for example, has shot up 46 percent since 2016, and even wealthier United States borrowers have been pushed to rack up new debts. With China’s implied exposure to these emerging-market borrowers growing, it could push China’s recent moves too far too fast. The recent increases in U.S. interest rates are another risky factor. So too is the appreciation of the yuan. Both could cause financial instability.
China’s monetary and fiscal efforts also highlight the disparity between economic power in the U.S. and China. The monetary and fiscal policies in the U.S. are much closer to U.S. economic interests. For one, the U.S. could not stand by while China stopped imports of our goods and was killing our jobs. Rather than closing its borders to our exports, Beijing could make trade fairer, while subsidizing local small manufacturers and adopting far more open currency policies than the current U.S. government has done.
What the U.S. needs to do, therefore, is directly challenge China’s rise. Such unilateral action would mean that both globalisation and economic internationalism must be reexamined. The world’s economy would be better off if America would use unilateral power, which is manifest in its financial and military strength, to make trade fairer and more integrated, instead of using it to paper over its internal problems.
A similar approach would be a step towards global regulation. Today, the scale of international banking is too large. An international bank regulator, or G20 bank watchdog, would ensure a consistent global standard across the G20’s member states, from the largest markets — such as China and the U.S. — to the smallest. Further, such a regulator could target areas of the global economy that are vulnerable, like shadow banking, global trade finance and pension plans. Such a regulator could target the dangerous costs of fraud, for example, in the financial services sector, or the risks to a retirement savings fund, which leads to a dramatic decline in the value of asset prices. Such an approach would move the world away from the current bailout system, which now needs to bail out a section of society only one time, at the end of a crisis, while expecting everyone else to save themselves.
These scenarios may seem far-fetched at first. Yet many investors and economists, such as Nicholas Schork and Eugene Fama, have been arguing that what we need are not America’s policies, but global ones. They have noted the comparative differences in global growth patterns between America and China. In fact, thanks to the influence of Chinese markets, and a slowdown in global growth, the share of global GDP in North America and Europe fell from over 70 percent at the end of World War II to below 30 percent today. This suggests that a global cooperation between the United States and China may be warranted. America can’t escape the global economy, and a dialogue with China can help the economies of both countries.
The issues will not be easy. Cooperation would mean mutual recognition of constraints on our freedom of trade and intellectual property. China should be held to its full economic policies, with market economies under Chinese law, as a criterion for admission to the World Trade Organization. And America should show equal diligence to China and resist its own protectionist policies.
However, for now, the Chinese government’s current move to support its economy with a burst of spending and currency depreciation, much of it borrowed, is beneficial for China. For the U.S., a downturn in China would be even more damaging. Therefore, U.S. interests are more in the balance than China’s. America should engage constructively with China, because the two of us can play well together.
After all, our interests may overlap more than we think. China is our second largest export market, and after the U.S., we are the largest importer from China. So, it makes sense for us to minimize China’s ability to wreak global financial damage. In the meantime, any deterioration