The world’s superpower

Is it the United States or China?

superpowers 

Leer en Español: La gran superpotencia mundial

Even though the United States’ GDP is still larger than Chinese’s, the Asian nation holds a larger purchasing power than the North American superpower. A greater purchasing power means that a holder of a dollar bill will be able to consume more goods and services in China than in the United States of America.

Chinese rapid growth is far from being a threat for the US. On the contrary, said phenomena generates a complementary effect that benefits the dollar. The Federal Reserve of the United States benefits the most from China’s advent.

Chimerica

Economists Niall Ferguson and Motitz Schularick introduced the term “Chimerica” in order to describe the symbiotic relationship between the Chinese and the American economies. Said relationship started with the North American’s financial structure, whose Central Bank determines the world’s risk-free interest rate and whose magnitude constitutes a global reference for the exchange of goods and services.

On the other hand, there is the Chinese banking system. In China, the rate of exchange between a yuan and a dollar is fixed and capitals are free to roam. This implies China’s monetary decisions are not sovereign. The yuan’s value is positively and strongly correlated to the U.S. dollar.

Chinese’s economic strength has resided for the last decades on it’s potential for massive manufacturing production given the large proportions of human capital the country is worth of. An increasing capacity for production has allowed China to fill global markets with their products in what is known as an overall competitive advantage.

The United States is a consumer nation and most of its consumption comes from China, meaning that the Asian nations gets to maintain a significant amount of dollars. Given that China has a fixed interest rate, there is no benefit in holding dollars, as it won’t change the value of the yuan.

“Chimerica” consists in China producing a large quantity of goods and services, who are then exported to the United States, and sold in dollars, and then shipped back to Asia. Once in Asia, the dollars will buy Federal Reserve’s treasury bonds.

The Federal Reserve’s treasury bonds have a zero chance of default, which means that they are safest investment our world provides. In this way, Chinese production ultimately becomes American debt in return of higher profits for Asian investors. Once the bondholders are paid back, the “Chimerica’s” cycle starts all over again.

Chinese economy is expected to double its size of the American economy by 2037 as market liberalization policies are to be applied in China in the midst of the People’s Republic first centenary in 2049. Donald Trump has openly displayed great respect for Xi Jinping, as their market cooperation remains solid.

 

 

Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Susana Cicchetto

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