Chapter 51 Summer 2008: The end of a piece of history

After nearly 20 years of development, Sino-US relations have entered the "China-US" stage, and a two-country or global economic system is taking shape.In the face of this situation, although it may not lead to a new war or "cold war", the tension between the two countries has not decreased, but increased.The attitude of the Americans towards China is generally more indifferent than enthusiastic, while the attitude of the Chinese toward the United States is distrustful, and they are extremely optimistic about China's future. Looking back now, the summer of 2008 should be the end of a period of history.The U.S. economy began to show cracks in the face of many pressures. Rising fuel prices, stagnant wages, and the real estate bubble have all become important reasons for crushing the U.S. economy. In March 2008, the famous Wall Street investment bank Bear Stearns declared bankruptcy, which was caused by the financial derivative business based on non-performing loans.Under the arrangement of the US government, JPMorgan Chase acquired Bear Stearns at a small price.Bear Stearns once attracted large-scale capital in China, and shortly before its bankruptcy, a well-known Chinese institution also injected billions of dollars into Bear Stearns.

Bear Stearns fell victim to the credit crunch, though the full extent of it was not yet clear. After the summer of 2008, the worst of the crisis was widely believed to be over, even as global equity markets continued to decline.In the U.S., the collapse of the housing market led to massive foreclosures, which in turn affected the devaluation of billions in derivative currencies.These currencies have been bought and sold among financial institutions around the world, and its devaluation has caused panic around the world.This summer, Wall Street suffered a heavy blow, and the world's real economy also showed weakness, but it has not yet developed to a very serious level.A global recession has begun, although no country acknowledged this fact until December 2008.With U.S. unemployment rising and Chinese exporters aware of falling demand in the U.S. and Europe, the summer of 2008 was surprisingly quiet.This reminds people of the First World War. In England in the summer of 1914, there was unprecedented peace before the war. It was not until the assassination of Archduke Franz Ferdinand, the crown prince of the Austro-Hungarian Empire, that the war began to gradually escalate.The First World War lasted for five years, destroyed three old empires, claimed tens of millions of lives, and ended in an unstable peace.

In September 2008, as soon as the Olympic athletes returned home, the disaster of the global financial system hit the world, which began with the bankruptcy of Lehman Brothers on September 15th.The U.S. government decides not to provide financial assistance to Lehman Brothers.Lehman Brothers was the straw that broke the camel's back.In the first two weeks of September, two mortgage finance giants, Fannie Mac and Freddie Mac, were nationalized by the U.S. government in case mortgage holders around the world defaulted on tens of thousands of dollars. billions of dollars in loans.American International Group, the largest industrial and commercial insurance institution in the United States, was established in Shanghai after World War I. It was also partially nationalized by the U.S. government and prepared more than $100 billion in guaranteed loans.

The global economic crisis spread gradually in the spring and summer of 2008.After hearing too much criticism from the United States (reform the exchange rate regime, open the economic system, reform the financial system), China rejects the United States' illusion of a balance between free markets and state regulation, and condemns Wall Street and Washington for paying too much attention Real estate and asset prices, so that they lost control over the crisis.Domestically, those advocating more direct investment in American companies and closer ties to Wall Street are clearly not credible.The problems in the financial system in the United States and Western Europe, as well as China's successful hosting of the Olympic Games, have given China's leaders confidence in China that only adherence to the socialist road is correct, and that only strong state control and intervention can maintain Stablize. Since September 2008, as the economic crisis has intensified, China's concern about the crisis has further deepened, and then this concern has turned into a sense of urgency to act in time to prevent the United States and its collapsed banking system from endangering China.

For years, economists and analysts have warned of the fragility of China's banking system.This judgment is based on a summary of years of practical experience and lessons learned in the United States.Western financial institutions put price risk and other risks that may be expected into a complex quantitative calculation model, and the results show that their banking system is close to the brink of collapse. United States. However, China's banking system is not unrelated to Western financial institutions.China's big banks not only engage in international exchange business and absorb capital from abroad, but also Chinese financial institutions (such as Bank of China) also invest heavily in financial derivatives and bonds, which are the instigators of the credit crisis.To make matters worse, China's central bank also used its rapidly growing currency reserves to buy mortgage bonds from US financial giants Fannie Mae and Freddie Mac instead of Japanese bonds and Cayman Islands hedge funds.China owns a total of $376 billion in bonds between the two financial giants. When these companies became insolvent in late summer of 2008, the problems facing the US became China's problems.

The actions taken by the US government are very different from those in the past.It allowed Bear Stearns and Lehman Brothers to go bankrupt, even though they were important Wall Street investment firms.But the U.S. government owned the financial giants Fannie Mae and Freddie to support the real estate market with mortgage loans and sold treasury bills to foreign investors.Fannie and Freddie's high S&P ratings, combined with the backing of the U.S. government, reassured investors that a default was unlikely.If there is a problem with these institutions, then 1/6 of China's currency reserves will be in a hurry, and China will face very serious problems.At this time, a series of domestic problems in the United States, such as a broken financial system, a sudden collapse of the housing market and escalating debt defaults, combined to gradually evolve into an international financial crisis.

It is often said that if the bank lends you $1 million, the pressure is on you; and if the bank lends you $100 million, the pressure is on the bank. In 2008, China became the largest creditor of the United States.China is the largest buyer of everything from U.S. Treasury bills to highly rated mortgages.China invests heavily in the United States because the United States is China's largest export market, and the surplus of international trade with the United States is settled in U.S. dollars. It is also necessary to use U.S. dollars for further purchases or investments, so China's investment behavior in the United States is not difficult. Understood.Since the renminbi was previously pegged to the U.S. dollar, the Chinese central bank's investments were mainly in U.S. assets.Creditors and debtors are inseparable, not to mention the trillions of dollars in loans and loans between China and the United States, the relationship between them is self-evident.

One day in the late summer of 2008, US Treasury Secretary Henry Paulson met with Chinese Premier Wen Jiabao in a private meeting.Paulson started the regular meeting between Chinese and American leaders, and he is very familiar with Chinese leaders.In response to the risks facing Fannie Mae and Freddie Mac, Chinese leaders expressed their concern that China's hundreds of billions of dollars of investment in the United States may suffer significant losses.Wen Jiabao hinted that if the United States is unable to control financial risks and guarantee the safety of foreign investors, then China will carefully consider its long-term investment strategy for the United States in the future.The leadership of the People's Bank of China also considered the possibility of de-pegging the yuan from the dollar at the time.Prices for goods purchased in dollars have continued to rise, weighing on China's economic growth.Paulson is very clear that the United States needs the support of international investment and good liquidity of capital, and China's loans are crucial to the United States.Therefore, in early September 2008, the U.S. Department of the Treasury nationalized Fannie Mae and Freddie Mac to express the responsible attitude of the United States towards international credit.

China is in a dilemma.What about the huge amount of US bonds that China already holds if they stop buying US bonds?If American companies do go bankrupt, what will happen to the parts of China's economy that depend on exports to the United States?The same dilemma that Wall Street is facing after lending large amounts of money to the United States is also facing China.After receiving a large amount of loans from China, the survival of many American companies began to depend on China's development.Therefore, the futures of China and the United States are firmly tied together. The economic crisis has unnerved people, it has shaken America's place at the center of the world, and it has created the chances for Barack Obama to win the presidency.The economic crisis has made China reassess its own image and consider what kind of identity it should enter into the international community dominated by the United States.The development of the United States is overly dependent on China, which is a bad sign, and the vulnerability of the United States is fully exposed in front of China.This is also a warning for China's reliance on foreign capital and technology to develop its domestic economy.

Neither China nor the United States realized the seriousness of the situation at first, which is the worst in the past 20 years. The 2008 Olympic Games did not expose the crisis behind the super fusion between China and the United States. It only proved the immeasurable value of Sino-US relations.However, the recent economic crisis did not show how fragile the global economic system is. On the contrary, it showed how stable the system was when the crisis came.