Last tango in Chimerica: the road to Splitsville

The ‘marriage’ between the economies of frugal, savings-conscious China and spendthrift America is set for an imminent divorce, with profound implications for the two countries and the rest of the world, say economic historians and analysts.

“When one person in a marriage works hard and saves and the other just spends, it makes for a very strained relationship,” says Harvard University economic historian Niall Ferguson, who coined the portmanteau word ‘Chimerica’ to represent the symbiotic, joined-at-the-hip nature of the economic relationship between China and the US.
“This marriage is on the rocks,” he says.

CLSA chairman and CEO Jonathan Slone invokes another earthy metaphor to convey the emerging strains in the Sino-US economic relationship. “China and the US are doing the tango, which is a very intricate dance requiring great coordination between the partners,” he says. “But right now there’s a problem: the room — signifying global trade - is shrinking, and they’re kicking each other and bumping against the wall — and each is blaming the other for the tangle.”

Just last fortnight, the US administration imposed a 35% emergency tariff on tyre imports from China, prompting retaliatory Chinese tariffs on US poultry and automobile products. But these, says Slone, “are merely the symptoms of the underlying problem, not the problem themselves.”

Ferguson believes China is fast coming around to the conclusion that the US consumer, whose binge-ing ways kept Chinese factories humming all these years, is “on the ropes, if not completely knocked out — and probably isn’t coming back.” The happy days, “when you sent all your made-in-China to Wal-Mart shelves — and so long as it was cheap enough, you couldn’t ship them fast enough — are gone.” For China, the “Chimerica model” is busted.

But when he meets US administration officials, Ferguson says he senses a disquieting error of perception about the “marriage” with China. “I’ve heard from so many US officials that China needs the US as much as we need them, and that if China stops buying US Treasury bonds — which keeps US interest rates low and feeds consumption — it will only hurt itself.”  

That, he warns, is “a profound error, a dangerous delusion.” For when China slips into a current account deficit, as it will perhaps next year, and it starts drawing down its foreign exchange reserves, “it’s game over,” he says.

Ferguson recalls a public spat he had with with Nobel Prize-winning economist Paul Krugman earlier this year on just this matter. “I had the temerity to suggest that if there was a new Treasury bonds issue for $1 trillion and if the established buyer - China - was no longer going to be there in the way it was earlier, it would put pressure on long-term rates.”

When there was a fundamental mismatch between supply and demand —- as there manifestly will be when China slips into a current account deficit —- “you can have pressure on 10-year yields even in a non-inflationary environment,” he reasons. And that, he says, is “bad news for a highly leveraged economy like the US.” The challenge for the US and for China, says Slone, “is that as they stop tangoing, they have to figure out what the next dance will be.”