The abstract concept of world economy adopted by the West as the theoretical foundation of its financial globalization campaign is obviously getting out of sync with reality. The West’s plan obviously was to create a global financial market under its own control, charged with the mission of distributing assets across the world.
The grip on the market was supposed to enable the key players to send destructive signals to national economies, to feed to them various toxic financial assets, or to occasionally bloc the accounts of defiant leaders, companies, and banks.At the moment, China’s national financial system remains insulated from this type of “coordination” and capable of playing internationally a big game of its own.
It should be noted that recently Dagong Global Credit Rating, China’s top rating agency, similarly to Standard and Poor’s downgraded the US credit rating in response to Washington’s enactment of a higher national borrowings ceiling. The West’s crisis and the unhealthy state of the global financial system automatically cast new light on the advantages of the Chinese system of financial control.
Under the circumstances, the part of the world economy powered by the yuan balances its part which fell into untamed dependence on the volatile Western financial markets. There is consensus among experts that the internationalization of the yuan proceeds considerably faster than expected. The calculations performed by Standard and Poor’s show that over the coming 2-3 years the share of yuan payments in China’s foreign trade will likely reach 20%-30%.
Under the circumstances, it will depend on the readiness of China’s trade partners to accept de facto overdue changes to what extent they will benefit from the currency diversification. Measuring the feasibility of switching the trade with China, including Russia’s energy export, to the yuan therefore appears to be a timely idea. It should be also taken into account that, in contrast to what is happening across Western markets, China’s domestic commodity prices currently stay on a steady upward trend.
China’s growing importance to commodity markets must not be ignored by Russia whose economy is propped up by the export of natural resources. A diversification of Russia’s east-bound energy export was officially installed into the national agenda, but so far the volume of fuel export from Russia to China remains stuck at a fairly low mark compared with that to Europe.
The widening of the zone of economies tightly interwoven with China’s economy translates into a serious modification of the traditional North-South interaction models, one of the scenarios on the horizon even being the partition of the global economy into two distinct spheres with their independent centers of gravity. For companies and governments, the dynamics should highlight the importance of developing strategies aimed at optimizing in advance the models of engagement with the Chinese economy.
In particular, it should be realized that the Chinese economy is increasingly exporting investments and that, in contrast to the Western capitals, those from China came into being in the settings of the national modernization and linked to the manufacturing sector rather than to financial markets.
The potential impact of Chinese investments on Russia’s economy is yet to be understood considering that the amount of those attracted by Russia up to date is fairly modest. Russian state-run companies, for example, should pay closer attention to the Chinese financial market as getting Chinese and other Asian investors involved into their anticipated partial privatization could prove to be an excellent idea.
Among other benefits, Chinese investments can help to shield Russian assets from speculative attacks and the Western investors’ mood swings. Notably, the Chinese stock market fared better than Western ones during last week’s panic caused by the US debt ceiling problem. Even when the Chinese stock market shows clear signs of overheating or suffers occasional asset value drains, China’s economic growth holds on thanks to the clever architecture of the national financial system originally designed to sustain the development of the manufacturing sector.
In this regard, China differers radically from the countries whose bloated financial sectors dominate their economies. As the credit ratings of the countries where the huge financial sector debts weigh on national budgets continue to slide, countries solidly free of external deficit are exposed to the threat of sharp revaluations of their currencies, which, in the cases of China and Russia, would undermine their export capabilities.
In contrast, the impact of the potential revaluations on the countries’ bilateral ties would be positive, especially if some level of coordination of the revaluation processes is achieved. The strengthening of the yuan, Beijing’s gradual loss of interest in pumping up its currency holdings, and China’s vigorous search for untapped investment niches altogether boost the importance of the China-Russia partnership for both countries.
China’s potential in the investment sphere is adequate to Russia’s task of cultivating its enormous and extremely resource-rich territories, meaning that the cooperation between Russia and China has a serious future. It should be taken into account as well that, in contrast to Western countries, China is not overreacting to the tide of panic currently sweeping across the world’s financial markets.
Assessing the damage the Chinese currency holdings may face as the dollar is shedding value, Chinese economists suggest using the reserves to reinforce the country’s positions internationally, to reign in inflation, to launch new investment programs, and, above all, to strengthen China’s domestic market based on higher population incomes.
There is concern in China that the country can be overwhelmed by foreign investments, with rocketing inflation as the likely result. For China, being a continent of stability takes more than just the abundance of financial resources – preserving the worldview which helps the Chinese solve problems and retain optimism regardless of how their situation is seen from the outside is similarly important.
Given the current volatility of Western finances, deeper engagement with China appears to be Russia’s natural approach to providing its national economy with some kind of defense. For Beijing, Russia’s standing would improve if the course it steers in the international economy meets the expectations of the Chinese regulators and business community who surely know what modernization is about.
By Alexander SALITSKI, Igor TOMBERG from Strategic Culture Foundation