China Calls For US Change After “Financial Tsunami”

For decades, the United States has asserted its right to intervene when less developed nations get themselves into economic hot water — whether the “assistance” is wanted or not.

As the world’s leading economic power, America has assumed that it knows best as far as the policies and strategies that others should follow to solve problems and realize their full potential.

Following events of the last year however, various emerging powers have come to the conclusion that the world’s long-time superpower has lost its edge.

In fact, as the following Reuters report, “China Paper Urges New Currency Order after ‘Financial Tsunami,’” suggests, at least one of these up-and-comers reckons it’s about time for a change.

Threatened by a “financial tsunami,” the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.

The commentary in the overseas edition of the People’s Daily said the collapse of Lehman Brothers Holdings Inc (LEH) “may augur an even larger impending global ‘financial tsunami’.”

The People’s Daily is the official newspaper of China’s ruling Communist Party, and the overseas edition is a smaller circulation offshoot of the main paper.

Its pronouncements do not necessarily directly reflect leadership views, but this commentary by a professor at Shanghai’s Tongji University suggested considerable official alarm at the strains buckling world financial markets.

China’s central bank earlier this week cut its lending rate for the first time in six years, a move analysts said was aimed at bolstering the economy and the battered stock market.

“The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States’ financial oversight and supervision,” writes the commentator, Shi Jianxun.

“The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States.”

But Vice Premier Wang Qishan, on a visit to the United States, told U.S. trade officials in a meeting on Tuesday that China and the United States needed to maintain close economic ties with global markets going through such turbulence.

“The Chinese government is well aware of the fact that the United States, which is the world’s largest developed country, and China, which is the world’s largest developing country, should have constructive and cooperative economic and trade relations,” he said.

China is a major buyer of U.S. Treasury bonds, and through its sovereign wealth fund it has taken stakes in two large U.S. financial institutions.

In July 2005, China revalued the yuan and freed it from a dollar peg to float within managed bands. But the yuan and China’s trade remains tightly linked to the fortunes of the dollar.

The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s.

“Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy,” the front-page comment stated.

Posted in Categories: Contributor, Economy, External Research, USA.

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Comment by U.S. American

2008-09-18 15:07:29

There’s nothing wrong with China’s desire to be more independent of the U.S. dollar, but the problem for China is that pointing the finger at the U.S. won’t solve the problem.

China needs to become less a pure export-driven country and really allow people to trade freely. Becoming less dependent on U.S. success is not going to happen when their global strategy for the past fifteen years has been to stockpile USD greenbacks for purposes unknown (I say purposes unknown, within the framework of the idea that stockpiled cash is a mortgage against domestic prosperity in exchange for leverage against a foreign nation through currency stockpiling).

If China wants to become more independent, ironically, it must first become more dependent — by spending its U.S. dollars.

Guess where U.S. dollars are primarily redeemed? In the U.S. economy.

So if you read between the lines, China is probably (understandably so) very concerned about the falling value of its stockpiled cash as well as the U.S.’s ability to pay back Treasury notes. But they are the #1 financier of that entire system.

For China to call for a change is most welcome. They control the U.S. financial flows at this point, so hopefully they will start to understand that they need to make changes in their own tactics if they really want to be less dependent.

Either way I see no reason to panic.

Financial crises happen every 5 or 7 years. It’s not new.

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