Is China Today the U.S. of 1929?

by: Paul Kedrosky

Good piece in Foreign Policy making a case that I do regularly, which is that there are striking similarities between the U.S. circa 1929 and China today. Both were/are creditor nations with massive trade surpluses, and both sit/sat astride the decline of the prior world power, which was the U.K. in 1929 and is the U.S. today. Most importantly, however, the U.S. in 1929 had an opportunity, as does China today, to use its economic power to drive the financial system to a new post-crisis place.

Just before the Asia-Europe meeting last October, President Hu Jintao stated that China would behave "with a sense of responsibility." It remains to be seen what stake China really has in the survival of the global economy. As in 1931, the political arguments are all against a rescue. Only the farsighted will see that the economic case for such an operation is compelling. Much depends on the extent of China's voice in an altered international institutional architecture.

But that voice will make demands that are increasingly difficult for the old world to accommodate, including demands for a guarantee of China's U.S. asset holdings and suggestions for an alteration of the world's reserve management. In proposing a global reserve currency to replace the dollar, the Chinese central bank president recently followed in the footsteps of Charles de Gaulle in the 1960s. But unlike France, China is in a much stronger position to assert its preferences for international monetary reordering.

In other words, the world may be asked to transition from an American to a Chinese model of capitalism, and as in the 1930s, that won't be an easy switch for any of us.

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