Satyajit Das: China sets out on long march back to self-reliance as trade gets rough

Midweek View: The country has become increasingly resentful about the destruction of the value of its savings
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The Independent Online

In a world where economic nationalism is reasserting itself, and as countries battle for survival against a backdrop of low growth, the Chinese mercantilist model is increasingly problematic.

China's policy position is driven by the economic problems of its major trading partners. Given their lower levels of growth, exports to Europe and America can no longer power the Chinese economy. China will have to rely on domestic developments to drive the strong growth necessary to preserve social stability and the rule of the Communist party. An internal focus would assist China in the rebalancing of its economy from one driven by exports to one with higher consumption.

China's economic redirection may be driven by its enormous loss of wealth from engagement with the West. Before the financial crisis, the US purchased real goods and services from China, financing them with dollar-denominated IOUs with low rates of interest. China's $3.4 trillion (£2.2 trillion) in foreign exchange reserves are invested primarily in government bonds and other high- quality securities denominated in US dollars, euros and yen.

These investments have lost value, through increasing default risk (as the issuer's ratings are downgraded) and deliberate policies to engineer falls in the value of the foreign currency against the renminbi. Attempts by the Chinese to liquidate reserve assets would result in sharp falls in the value of the securities and a rise in the renminbi against the relevant currencies, with large losses.

China has become increasingly resentful about the destruction of the value of its savings. In an article in the Financial Times just a year ago, Jin Liqun, chairman of the supervisory board at the China Investment Corporation, the nation's sovereign wealth fund, responded to criticism of China's response to the European debt crisis as follows: "From the outset of the crisis, China has responded positively and firmly to Europe's appeal for support. But it should be received as an important and responsible stakeholder, not as an outside creditor relegated to lower levels of seniority in moments of urgency. It should be treated equally with the European Central Bank in the event of any debt restructuring."

Reducing international engagement would allow China to write down its investment over time. This would also minimise the need for further investment to protect the value of existing holdings, freeing resources for internal requirements.

As in any divorce, both partners – China and its major trading partners – increasingly recognise the lack of mutual benefit in continuing existing arrangements.

At the July 2012 G20 meeting in Mexico, China made it clear that it would not initiate the type and scale of bank lending that it unleashed after the initial phase of the financial crisis in order to boost Chinese and global growth. With the country unwilling to take steps to become the consumer of last resort or open its markets to foreign businesses, developed countries are increasing critical of Chinese policies.

China sees diminishing gains for engagement with external parties other than on its own terms. It resents external pressures on its economic policies, currency value, trading practices, political system, foreign policy and human rights record. It resents the hypocrisy of developed nations in dealing with a great power.

Chinese history is shaped by successive humiliations in dealings with the West. Economic disengagement is dictated, in part, by fault lines in the relationship between China and its trading partners.

China has shifted its priority to food and energy security to sustain its development. It is buying food and energy independence through targeted investment in foreign suppliers. In some cases, these investments also secure external markets for Chinese goods and services.

For China, a reversal of a policy represents a return to traditional economic self-reliance and a limited interest in trade. As Robert Hart, a British trade commissioner in 19th century China, wrote: "[The] Chinese have the best food in the world, rice; the best drink, tea; and the best clothing, cotton, silk, fur. Possessing these staples and their innumerable native adjuncts, they do not need to buy a penny's worth elsewhere." Engaging with gweilos (a Cantonese term meaning foreigners or foreign devils) is the exception not the norm in Chinese history.

Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'