The financial crisis will do great harm to the US economy. But more importantly America's image as the global economic leader, which has carried it through past military victories and defeats, has been irreparably damaged. The sheer scope of US banks' speculation is causing other nations to question whether America will ever be a safe investment again. And after years of lecturing others, the US dithered in its response, at first even failing to approve a rescue package. Now, Washington is even looking to London for leadership. But it is events in Beijing that should most worry US policy makers.
The financial crisis will not prove as damaging to China. With its $1.9 trillion in currency reserves, $370bn current account surplus, capital controls, and an essentially closed stock markets, China is well prepared to weather the financial panic. Though its economy remains driven by exports, which will be hit by falling demand in the west, the Chinese have amassed massive pools of savings. Their government can also rely on domestic consumer demand to power through global economic hard times. The World Bank predicts China will post over 9 per cent growth this year. That's not a typo; by comparison, the US will almost certainly fall into recession.
Riding high, Beijing is manoeuvring to play the crisis to its benefit. This shouldn't be a surprise. China has form cashing in on American failure. During the Asian financial crisis of the late 1990s, the US moved too slowly to offer help to struggling countries. China, however, refused to devalue its currency, and publicly touted its decision as standing up for its Asian neighbours. The move brought Beijing back to respectability as a regional power, after decades of Mao-era meddling in neighbours' wars.
Today, China's $200bn state wealth fund, the China Investment Corporation, is scouting for opportunities among the west's wreckage. Already it has recapitalised some rocky companies, including the high-profile private equity group Blackstone. The fund has even launched a new recruiting round on Wall Street, trying to lure top analysts and managers away from their diseased investment banks. Meanwhile, Chinese leaders are also aggressively wooing foreign investment, while reassuring Asian neighbours that they will help them survive the global panic, even if no one else comes to their aid.
In the future America's economic failure will lead global financial managers to look elsewhere for profits. (This, in turn, will make it harder for the US to rack up the sort of large deficits that have long supported America's spending.) "There are numerous types of well-funded investors who need urgently to redirect their capital to markets that provide the kinds of returns sought by their limited partners, pension holders or sovereign funders," notes Ken DeWoskin, an expert at the University of Michigan in a recent essay. Foreign capital investment in China has already risen sharply in the first half of 2008.
Eventually, if the crisis lasts years, China may become the only government capable of restoring the world to growth by recapitalising failing institutions. Chinese leader Hu Jintao has already been more proactive in consulting with global leaders than previous Chinese heads of state. This was a role, of course, America played at home during the great depression. But that was a different time.
