Economic historian Niall Ferguson says we are about to see the death of a monster that has created a global imbalance. He calls the monster Chimerica, the double-layered portmanteau combining the names of China and America and summoning up the ghosts of the monster known as the chimera.
In this paper, Ferguson and German academic Moritz Schularick argue that the financial crisis of 2007-2009 is likely to mark the beginning of the end of the Chimerican relationship which with a combined 13% of the world's land surface and about a quarter of its population accounted for a third of global economic output and two-fifths of worldwide growth between 1998 and 2007.
All of that is about to end with the global financial crisis.
For China, the great attraction of the relationship was the it fueled export led growth. As a result, China quadrupled its gross domestic product between 2000 and 2008, raised exports by a factor of five, imported Western technology and created tens of millions of manufacturing jobs for the rural poor. For America, it meant low interest rates and high consumption. The problem, they say, is that with the financial crisis, China has has pegged its currency to that of the largest economy at a strongly undervalued exchange rate. "In the depressed conditions caused by the financial crisis, this peg poses a double threat. First, it limits U.S. recovery by overvaluing the dollar in key Asian markets. Secondly, as the dollar weakens against other developed world currencies-notably the euro and the yen-the burden of adjustment falls disproportionately on Europe and Japan." And that in itself would result in more protectionism.
They say China will need to revalue the renminbi, and that will effectively end the marriage. China doesn't have a choice. The unanswered question is whether America can adjust to a low consumption, frugal economy, although the writers say it will be in America's best interest. What's clear however is that we are entering uncharted territory.
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