Shortly before the anniversary of the great Western credit crunch, I paid a visit to its antithesis: the great Eastern savings splurge. Nowhere better embodies the breakneck economic expansion of China than the city of Chongqing. Far up the River Yangtze, it is the fastest growing city in the world today. I had seen some spectacular feats of construction in previous visits to China, but this put even Shanghai and Shenzhen into the shade. There was something truly awe-inspiring about the countless tower blocks under construction, the innumerable cranes perched on the city’s hills, the gleaming new highways, the brand-new enterprise zones, the ubiquitous smog. I felt I was witnessing an industrial revolution several orders of magnitude larger than the Industrial Revolution that once filled the cities of the West – of the British Isles and North America – with similar noxious fumes.
Yet in some ways Chongqing also reminded me, eerily, of the Soviet Union in the 1930s. Because it is, unmistakably, a product of a planned economy. The reason that Chongqing is growing so fast has little or nothing to do with market forces, and everything to do with a decision taken in Beijing to turn Chongqinq into the biggest financial and manufacturing centre in western China. As local officials told me about the 30 bridges they were building, the 10 light railways and the millions of square meters of residential and office space, I find myself thinking: this is the reincarnated spirit of early Stalinism. There is the same sense of limitless possibilities, the same sense that state-led industrialisation can take you to the moon and beyond. But there is also the same sense that the negative externalities of growth are being ignored. As in the Soviet case, in China today there is little evidence that the factors of production are being accurately priced; little evidence that the pollution of air, soil and water is being properly accounted for. China’s industrial take-off may have begun with foreign direct investment and an export drive aimed at Western markets. Today it has become domestically driven, both in terms of the sources of investment and the sources of demand. The state is in the driving seat.
And so I came away from Chongqing thinking differently about China. In particular, I came away convinced that we are living through the end of something Moritz Schularick and I christened “Chimerica”. In our view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica that relationship accounts for around 13 per cent of the world’s land surface, a quarter of its population, about a third of its gross domestic product and somewhere over half of economic growth in the past six years.
For a time, it was a symbiotic relationship that seemed almost perfect. To put it very simply, one half did the saving and the other half did the spending. Comparing net national savings as a proportion of gross national income, American savings declined from above 5 per cent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 per cent to nearly 45 per cent. This divergence in saving allowed a tremendous explosion of debt in the United States because one effect of what Ben Bernanke, chairman of the US Federal Reserve, called the Asian “savings glut” was to make it very much cheaper for households to borrow money – and to a lesser extent for the government to borrow money – than would otherwise have been the case.
Needless to say, it was not just the United States that was borrowing, and it was not just the Chinese who were lending. All over the English-speaking world, as well as in countries like Spain, household indebtedness increased and conventional forms of saving were abandoned in favor of leveraged plays on real estate markets. Meanwhile, not only China but other Asian economies adopted currency pegs and accumulated international reserves, thereby financing Anglosphere deficits as well as keeping their exports affordable. Middle Eastern and other energy exporters also found themselves running surpluses and recycling petrodollars to the Anglosphere and its satellites. But it was Chimerica that was the real engine of the world economy.
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