The most significant aspect of the furore surrounding the US sovereign debt crisis and the loss of the much and, it has to be said, overly prized triple-A credit rating by the world's sole superpower, has been the rebuke delivered to Washington by the Chinese in response. Currently the largest single offshore holder of US sovereign debt, with 46 percent of US dollar reserves sitting in its central bank, China's sternly worded criticism of the state of the US economy and its perennial indebtedness came as a timely reminder of the dependence of the US on Chinese largesse, with China the main source of funding of a rampant level of US consumption which the ongoing economic crisis has revealed is no longer sustainable - not only domestically but more crucially globally.
Over the past twenty years China and the US have been involved in a bilateral economic relationship that has made the fortunes of each almost wholly dependent on the other. China's economic growth over the past decade has been simply staggering, averaging 10-12 percent annually, largely due to the US export market and a level of consumption that has been both the driver of global economic growth and the underlying cause of the current global recession. In 2010, in the midst of a global recession, China's economy registered a remarkable ten percent growth when most economic experts had predicted it would plateau at around 6-8 percent, still impressive compared to other industrialised economies. Consider for example that the US economy only grew by 2.8 percent in the same year.
But in recent years, in a process that's been accelerated as a result of the global economic crisis, China has been actively adapting to the decline of the US economy and demand from Europe by increasing its economic footprint regionally in Asia, specifically in its trade relationships with Japan and South Korea. Earlier this year trade ministers of those three countries met in Tokyo, where they looked into the feasibility of setting up a trilateral free trade agreement. As an export driven economy, China views Japan's recovery after the huge earthquake and tsunami it suffered in March as vital to its own sustainability and continued growth.
But the most important adaptation to the global economic crisis by China has been its orientation towards the development of its domestic economy. As millions continue to migrate from the countryside into the city each year, in a process that shows no hint of slowing down, China's priority is ensuring its economy is able to meet the increased demand for jobs within its urban centres. Huge capital investment projects have been undertaken over the past few years to offset the drop in demand for exports, with the Chinese taking advantage of its unique position in the world of being deposit rich as a consequence of an economic model which has placed a priority on saving over consumption. The lack of social protection provided by the state is largely responsible for this high level of saving within the Chinese economy, a situation which the Chinese government is currently in the process of alleviating, especially in light of the global recession and the fear it could precipitate a spike in unemployment. Without a viable system of social protection in place large scale unemployment could be the catalyst for widespread social unrest.
Added to the rapid increase in urban population and new jobs to meet the demand incurred, increased social protection is having the effect of increasing domestic consumption. This is the main reason why China has been able to protect itself from the global downturn to the extent it has, offsetting the reduction in global demand for its exports. Regardless, the global share of Chinese global exports in 2010 came to £1.5 trillion. This means that China continues to export more than any other single major economy, with only the European Union in is entirety exporting more. Germany comes second on the list of the world's major exporters with $1.3 trillion, while the US is third with $1.2 trillion worth of exports in 2010.
Standard and Poor's decision to downgrade the US economy's triple-A rating is both historically and symbolically monumental in terms of its impact on US hegemony. The ideological struggle that was played out to the last minute in the US Congress over recent weeks is reflective of the animus and deep division that exists within the US body politic between the Republican right and the rest of the US political class. Many up until recently had downplayed the significance and influence of the self styled Tea Party movement in Washington. The political gridlock that has gripped the country proves beyond doubt that this was a mistake.
The rise in social divisions within the US as a consequence of a contracting super rich class and growing poor must be a cause for concern. Indeed, the pillars of US capitalism have consolidated in recent years to comprise almost solely Wall Street and the Pentagon, the drivers of innovation and economic activity as each profit off the other in a circular relationship that depends on perpetual war and unsustainable levels of investment. The ability of the US to borrow on the strength of the dollar has been the key to the ability of past US administrations, both Republican and Democrat, to keep taxes low in order to appease the rich donors and corporations that fund both parties.
China's role in managing US economic decline will grow ever more important if the current trajectory of US politics continues. Indeed, China's emerging role as the investor of first resort within the global economy has never been more vital as the fractious political divide within the US renders it dangerously volatile and unstable as it turns in on itself.