‘Chimerica’ is Headed for Divorce

In Newsweek, Niall Ferguson argues that the seemingly inseparable economies of China and America may be headed for separation:

Back in early 2007, it seemed as if China and America were so intertwined they’d become one economy: I called it “Chimerica.” The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.

As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. So they intervened consistently in currency markets, and as a result, they now have international reserves totaling $2.1 trillion. About 70 percent of these are in dollar-denominated securities, and a large proportion of these are in U.S. government bonds. The unintended effect of this was to help finance the U.S. current-account deficit at very low interest rates. Without those low long-term rates, it’s hard to believe that the U.S. -real-estate market would have bubbled the way it did between 2002 and 2007.

For a time Chimerica seemed like a marriage made in heaven: both economies grew so fast that they accounted for about 40 percent of global growth between 1998 and 2007. The big question now is whether or not this marriage is on the rocks.

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