Global Financial Markets (FIN10102) Coursework
Harvard history professor, Niall Ferguson, published his opinion on the media when Obama won the president election, and whose opinion is “the first work for president Obama is to call Chinese government leaders to negotiate policy, since China is the key factor which effects whether America can recover from the financial crisis.” The term “Chimerica”, coined in Niall Ferguson’s book The Ascent of Money: a Financial History of the World, is to describe the economy system between China and America. Chimerica represents a new financial cooperation. Data shows that America needs to borrow 800 billion dollars from world in 2007, and China owns 262 billion dollars which stands a quarter of America debt requirement (Niall Ferguson, 2008). In the past decade, geo-economic system has become the leading system between China and America, and Chinese export-led development combined with American over-consumption, which produce a new world economy system (Ferguson and Schularick, 2007).
a) How Chimerica produced
From 2000, the export-led development pushed Chinese economy, which made China’s GDP turn double and export volume increase by five times, now China own over two trillion reserves, besides which, China introduced western technology and equipment to improve production and provide more employment to rural areas. Chimerica means more consumption and less saving for America and keeping low interest rate and steady investment rate as well (Reisen, 2009). Chimerica economy system covers approximate 13% world’s land area, a quarter of world’s population, over a third of GDP and two fifths of global economic growth (see figures as below). This financial marriage also seems to benefit other countries that global trade markets flourish and almost all the asset price have sharply increased. Therefore, if any troubles occur in Chimerica economy, global economy will be affected accordingly.
In 2009, the US GDP per capita was $44,000 while China’s GDP per capita was only $2,000 (see figures as below). Why would China whose GDP is much lower than US like to keep purchasing US treasuries? Why does China still lend money to US when China is developing quickly? Through borrowing massive money, US can ease internal financial problems without any loss, for instance, US needs to borrow money to purchase back the property after financial crisis. Lending money to America or purchasing US treasuries help to avoid the appreciation of Chinese currency, keep export market competitive advantages and stimulate American to consume Chinese goods.
The origin of financial crisis is the bubble which was caused by pre-mature consumption. The bubble formed from two aspects. The first one is that US Pre-president George Walker Bush implemented “imperial govern”, which made some enemies for US and led huge amount military expenditure (see figures as below). The second reason is the American’s opinion of pre-consumption who mortgage their fixed assets to get loan to consume which form financial bubble. When the bubbles break, such consuming behaviors will become burden to people and banks. For example, a $600,000 property leaves a $400,000 loan payable, when the property price drops to $300,000 then nobody will keep paying the loan. Thus the financial pressure shifts from debtors to banks, which leads banks go bankrupt and influence companies operation, personal credit even domestic economy. In order to rescue crisis, government needs to take effective actions to buy back these properties, ease banks’ financial pressure, which needs huge amount of money. Generally there are three ways to obtain money – increasing tax, printing money and borrow money. During financial crisis, increasing tax will negative influence consumers’ behavior and lead to lack of market demands. Printing money is the most convenient way, but once government print without restriction, US dollar will lose credit,...
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