The Dollar Imbalance

Wen Jiaobao is an old-school communist leader with a surprising popular touch. He's a master propagandist and a deft politician - remember him at the train stations exhorting people to weather the snow and ice a year ago? Never had a Chinese leader appeared in front of crowds feeling their pain. He weighs words carefully and his tone carries conviction.

So his expression today of worry over America's attempt to spend its way out of recession should prick the world's ears up.

There's one thing Chinese leaders know better than almost anyone else it's the history of the imperialism. They have a keen appreciation for Britain's fall and decline. It went hand in hand, the history commissars will tell you, with sterling's collapse.

Under the British Empire, the colonies -that is India, Malaysia, Africa etc - all ran a current account
surplus with Britain. They had to because they were meant to be self-sufficient. These surpluses
were sent back to London where they purchased government bonds or Consols. British banks then lent to British companies to go off and invest in the empire.

Overstretch first militarily and then financially saw Britain end up in hock to the United States and voila the Sterling world became Dollarized. The colonies suffered as local industry was stifled and holdings lost their value.

Today prime minister Wen is warning the US not to overspend - fearing that dollar devaluation would affect China's own reserves. China holds a trillion dollars in US treasury bonds so a sliding US currency would hit them hard. Of course crisis offers opportunity; America weakened offers a chance for China to exert itself. But this all comes too soon for Beijing.

It is not that Beijing does not have the ambition to be top dog, it is that China is not ready to assume the mantle of global economic leadership. Hence to maintain stability - and important ensure global demand takes off without crashing down to earth - Wen Jiabao calls for fiscal restraint. By questioning the sums thrown about by team Obama the Chinese politbureaucrats are also signalling that they no longer sees the US treasuries as the safest haven. Beijing aims to put its money elsewhere. It will end its export-driven model of growth. It will end its dependency on Washington. Domestic demand will be prioritized.

Unless Obama perhaps caves in on some vital Chinese interest, Beijing will accelerate its attempts to secure a new, more independent role in global affairs. We are about to live in interesting times, indeed.