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Shortly before the anniversary of the great Western credit crunch, I paid a visit to its antithesis: the great Eastern savings splurge. Nowhere better embodies the breakneck economic expansion of China than the city of Chongqing. Far up the River Yangtze, it is the fastest growing city in the world today. I had seen some spectacular feats of construction in previous visits to China, but this put even Shanghai and Shenzhen into the shade. There was something truly awe-inspiring about the countless tower blocks under construction, the innumerable cranes perched on the city’s hills, the gleaming new highways, the brand-new enterprise zones, the ubiquitous smog. I felt I was witnessing an industrial revolution several orders of magnitude larger than the Industrial Revolution that once filled the cities of the West – of the British Isles and North America – with similar noxious fumes.

Yet in some ways Chongqing also reminded me, eerily, of the Soviet Union in the 1930s. Because it is, unmistakably, a product of a planned economy. The reason that Chongqing is growing so fast has little or nothing to do with market forces, and everything to do with a decision taken in Beijing to turn Chongqinq into the biggest financial and manufacturing centre in western China. As local officials told me about the 30 bridges they were building, the 10 light railways and the millions of square meters of residential and office space, I find myself thinking: this is the reincarnated spirit of early Stalinism. There is the same sense of limitless possibilities, the same sense that state-led industrialisation can take you to the moon and beyond. But there is also the same sense that the negative externalities of growth are being ignored. As in the Soviet case, in China today there is little evidence that the factors of production are being accurately priced; little evidence that the pollution of air, soil and water is being properly accounted for. China’s industrial take-off may have begun with foreign direct investment and an export drive aimed at Western markets. Today it has become domestically driven, both in terms of the sources of investment and the sources of demand. The state is in the driving seat.

And so I came away from Chongqing thinking differently about China. In particular, I came away convinced that we are living through the end of something Moritz Schularick and I christened “Chimerica”. In our view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica that relationship accounts for around 13 per cent of the world’s land surface, a quarter of its population, about a third of its gross domestic product and somewhere over half of economic growth in the past six years.

For a time, it was a symbiotic relationship that seemed almost perfect. To put it very simply, one half did the saving and the other half did the spending. Comparing net national savings as a proportion of gross national income, American savings declined from above 5 per cent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 per cent to nearly 45 per cent. This divergence in saving allowed a tremendous explosion of debt in the United States because one effect of what Ben Bernanke, chairman of the US Federal Reserve, called the Asian “savings glut” was to make it very much cheaper for households to borrow money – and to a lesser extent for the government to borrow money – than would otherwise have been the case.

Needless to say, it was not just the United States that was borrowing, and it was not just the Chinese who were lending. All over the English-speaking world, as well as in countries like Spain, household indebtedness increased and conventional forms of saving were abandoned in favor of leveraged plays on real estate markets. Meanwhile, not only China but other Asian economies adopted currency pegs and accumulated international reserves, thereby financing Anglosphere deficits as well as keeping their exports affordable. Middle Eastern and other energy exporters also found themselves running surpluses and recycling petrodollars to the Anglosphere and its satellites. But it was Chimerica that was the real engine of the world economy.

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Kevin Boyles
December 23rd, 2008
10:12 AM
The main differences between previous empires and China eventual global domination is that Chinese culture is one of saving not spending, whereas British and US culture and economy has been based on spending.

December 23rd, 2008
10:12 AM
I think that the key limit to China's growth will be oil. And that oil - if it were to become scarce in 2075 may end the Chinese economy, the US economy and the European economy simply because no substitutes have been found for kerosene, and alternative fuels are too expensive to create if you don't have oil (because they take more energy to produce them than they produce). The world must one day return to 3 billion people - the number that our sun can sustain without fossil fuels.

Michel Tremblay
November 18th, 2008
4:11 AM
Alfred may have a point that unless reforms are introduced the Chinese miracle may not be sustainable. However, India will most certainly not be a replacement with a relatively closed economy, an systemic corrupt bureaucracy and widespread extreme poverty. India will not be on course to challenge China for at least the next century.

Tom Burkard
October 16th, 2008
10:10 AM
Niall Ferguson is correct in stating that gold was scarce at the start of the industrial revolution, but he ignores the role of credit and banking. In the 18th and 19th centuries, Britain's growing military and naval power--which opened markets to British exports-- depended crucially upon its ability to borrow money cheaply, mostly from its own citizens. The Whig revolution ensured that it was safe to invest in Consols, as the rentier class controlled Parliament. Britain was unique in having an open economy where there were almost no restrictions on investment or enterprise, and an independent judiciary meant that there was little fear that government (or anyone else) would confiscate property. Hence, Britain became a magnet for the most talented and enterprising people in Europe and beyond. Alfred Mahan is right to question whether China's growth is sustainable; the lack of free institutions may well inhibit the development of a modern, market-based economy.

Alfred T Mahan
September 2nd, 2008
10:09 AM
This is fascinating, but when you compare modern China to Stalinism you seem to assume that China's growth will continue. However the history of the USSR shows us that planned economies sooner or later collapse because their allocation of capital and the economic incentives to produce are inefficient. At the stage of building infrastructure, this is not so apparent as it is later in the development cycle when consumption is more important. I therefore question whether China's growth is sustainable over the decades needed to overtake America, even given China's huge size advantage. While you are right to point out the parallels between the decline of the British Empire and the USA's current position, might it not be that some other power or powers arise rather than just China? I'm thinking especially of India, which has a huge population, a pluralistic political system, and an economy growing rapidly on the basis of (broadly speaking) liberalised and therefore efficient market-centred policies.

August 29th, 2008
11:08 AM
This is great. Standpoint is an excellent magazine! I wish it were widely translated, and generously distributed in Eastern Europe, in countries like Georgia, Ukraine, Moldova, Romania, and the rest. This piece by Niall Ferguson is yet another proof of his brilliance and exactitude. Also, many thanks for the discussion on Gulag, Stalin and Mao. More of that is needed, in Britain and in the West. You deserve heartfelt thanks and warm congratulations.

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