China Should Bail Out the West

Beijing should bankroll a new “global rescue fund” to help countries hit hardest by the economic collapse.

In the wake of the global financial crisis, most countries are looking to the United States to stabilize markets and prevent a second Great Depression. “Americans don’t have a choice, they must absolutely have a global plan,” the head of France’s central bank told reporters. But rather than asking Washington to save the day, the world should choose a wiser strategy—pass the buck east, to the only nation benefiting from the crisis, and the one with the resources to bail out the world.

For years, Western nations have criticized China for its state-controlled model of development, in which Beijing protects certain strategic industries, refuses to let its currency float on world markets, and uses capital controls in part to ensure its citizens save a high percentage of their incomes. “China is a manipulator [of its currency],” New York Senator Charles Schumer, a frequent China critic, charged at the Senate Banking Committee hearing last year.

Since the late 1970s, though, this strategy has brought China the fastest growth in modern history, and now Beijing’s decision looks even wiser than ever. Because of its currency restrictions, China’s renminbi cannot be attacked by speculators and traders. Because of its capital controls, it has amassed one of the largest pools of savings in the world, since its people have few options other than saving. If China’s economy cools down—it is still growing by 9 percent, even during the global crisis—the government can inject massive amounts of capital to bail out the Chinese economy.

While China saves, Western nations struggle to gain any traction against the global fiscal meltdown. And if their giant rescue packages fail—thus far they have failed to stop the wild market fluctuations—the American and European governments will eventually be tapped out, running such huge deficits they can no longer afford massive state interventions. The other major world economy, Japan, has little to contribute to the rescue either—it still has barely recovered from its own devastating crisis, during the 1990s.

That leaves China. With as much as $2 trillion in currency reserves—by far the most on earth—China could save the day. It could become a lender of last resort to distressed banks and other financial firms across the world, or could funnel some of its money to the International Monetary Fund, which helps stabilize debt-ridden countries. Beijing could even bankroll a large, new “global rescue fund” to help countries hit hardest by the crisis, an idea proposed at one recent world summit.

A rescue would show that Beijing’s model of development—one that doesn’t involve messy things like democracy—can stand up to the Western democratic gospel preached since World War II.

A Beijing bailout would not be pure altruism; it would benefit China greatly as well. By taking the lead, China would put itself in position to pick through Western financial firms and other companies for the best assets. Already, China’s state-controlled fund has invested in Morgan Stanley, and has started recruiting people to work for the Chinese fund as American investment firms lay off workers en masse. Beijing also has negotiated new deals with Russia, possibly providing at least $20 billion in loans to Russian petroleum firms in exchange for oil, a resource vital to China’s energy-hungry economy.

Bailing out the West also could prove the final capstone in China’s global ascendancy, signaling, like the United States’s dominance of the post-WWII globe, that Beijing has arrived as a power—and even has lessons to teach other nations. A rescue would show that Beijing’s model of development—one that doesn’t involve messy things like democracy—can stand up to the Western democratic gospel preached since World War II. And once shy of promoting its model, China now may be ready to play the leader. In recent years, Beijing has started touting its success to other nations through annual training programs for thousands of officials from across the developing world.

Some in Beijing already have begun crowing over this power shift. As one Chinese state media outlet put it, in slightly less diplomatic terms than some of the Chinese officials I’ve met: “The United States is no longer the omnipotent savior and global protector of American values.”

But passing the buck to Beijing would have benefits for other countries, too. By relying more on Chinese capital, Western countries would not have to run as large deficits, and could use their state funds for other desperately needed initiatives, like ensuring workers hurt by the crisis still have some form of health care or reforming retirement benefits, since most Western nations have aging societies. Many of these countries already have decimated their state treasuries: Between the $700 billion financial rescue package and the $787 billion stimulus bill, America’s deficit will run over $1.5 trillion this year.

Even better, passing the buck will help cement China into the international system, which would be an enormous relief for the United States and other Western nations. Right now, many Chinese leaders seem unsure whether Beijing should play nice with the world—by helping resolve the North Korean nuclear crisis, for example—or go it alone, as China has for decades, by continuing internationally frowned-upon activities like shipping arms to Zimbabwe even as Robert Mugabe’s government brutalizes its opposition. Many American officials I’ve spoken with fear that, in the long run, a go-it-alone China will become angrier and more aggressive, like Japan before WWII, with few links to the world to restrain it.

By investing in a global financial rescue, China could no longer go it alone; its fortunes would now be closely tied to the health of the world. A nation that has helped bail out, say, South Africa—a country hit hard by the global financial crisis—could hardly also continue backing Zimbabwe, where the ongoing political warfare destabilizes its neighbors by sending thousands of refugees streaming into South Africa. A nation investing all over the globe could no longer avoid joining the clubs of major powers, like the G-8 summit of industrialized nations, to which China does not yet belong. And a country that, eventually, might wind up using its massive savings to rescue much of America’s financial institutions would find it harder to, one day, turn around and attack the United States.