Niall Ferguson has a pithy and provocative essay in the new Newsweek. He writes:
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.
This arrangement may be about to break down, however. For Ferguson continues:
The trouble is that the Chinese clearly feel they have enough U.S. government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy, plus the Federal Reserve's policy of quantitative easing (in layman's terms, printing money), are going to cause one or both of two things to happen: the price of U.S. bonds could fall and/or the purchasing power of the dollar could fall. Either way the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the United States has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the dollar. Then their economy tanked.
As the Chinese begin to replace their investment in American government securities with investment in overseas assets (namely, raw material production in Africa), they will have more freedom to challenge American foreign policy. "[I]magine a rerun of the Anglo-German antagonism of the early 1900s," Ferguson writes, "with America in the role of Britain, and China in the role of imperial Germany. This is a better analogy because it captures the fact that a high level of economic integration does not necessarily prevent the growth of strategic rivalry and, ultimately, conflict."
We'll know something is up when dreadnought production increases. Oh, wait: it already has.
This is also a good moment to plug Gary Schmitt's new book The Rise of China: Essays on the Future Competition, which features essays from, among others, Robert Kagan, Dan Blumenthal, Ellen Bork, and Nicholas Eberstadt.