Diverging Fortunes Put China and the U.S. on a Collision Course

Chinese President Hu Jintao and President Barrack Obama
Chinese President Hu Jintao and President Barrack Obama

Not too long ago, booming trade relations between the U.S. and China had the two countries being touted as a model partnership between two powerhouses. The fast-rising Asian juggernaut provided the U.S. with cheap goods and ample credit, while U.S. consumption of China's goods helped fuel a rapidly expanding Chinese middle class.

The term "Chimerica," coined by Harvard historian Niall Ferguson, helped thrust this supposedly symbiotic and ever-closer relationship into the public sphere. But the seemingly cozy relations between the two countries have been coming apart fast in the wake of the financial crisis.

And investors should be aware of the implications of the U.S.'s growing resentment given China's soaring importance on the world stage. In short: The notion of Chimerica is becoming chimerical as those tensions mount.

Politics and Policy Aren't Helping

The two countries' starkly different economic fortunes set the stage for the current disagreements. While the U.S. is suffering from unemployment of near 10%, China's economy is racking up growth at the same rate. The domestic politics and policy responses from both countries, though, have poured fuel on the blaze created by these rapidly diverging directions.

While the U.S. Federal Reserve is busy fighting a potential for deflation, Chinese policymakers are grappling with rapid inflation instead. And the fears now are that the latest round of quantitative easing by the Fed, which aims to stoke price gains in the U.S., may instead add to already strong inflationary pressures abroad because of the instant flow of funds in interconnected financial markets.

"Don't make other people take the medicine for your disease," Chinese Ministry of Commerce official Yu Jianhua said at the G-20 meeting. "Quantitative easing will have a very big impact on developing countries including China."

Is China Taking American Jobs?

Of course, well before the Fed's latest moves, American politicians have been putting increasing pressure on China to let its currency rise. By pegging the yuan to the dollar and keeping it undervalued, China makes its exports cheaper than they should be and is able to take an unfair share of jobs as well, the argument goes.

President Obama became the latest to take that line in what was largely a G-20 meeting with few tangible achievements for American positions (Chinese President Hu Jintao and Obama are pictured above at the G-20 summit in Seoul). Many analysts have questioned the stolen-jobs logic given the vastly different labor costs between the U.S. and China.

China has also vigorously argued that it has no choice but to opt for a gradual appreciation of the yuan rather than an abrupt adjustment. Given the razor-thin margins of the Chinese export sector, a sudden jump could wipe out many firms and lead to social upheaval.

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China has also made a big push to portray itself as a force for global economic stability. The country helped prop up the euro and stabilize Greek bonds earlier by saying it would be a buyer amid chatter about whether it would head for the exits.

China has alluded to similar commitments for other troubled peripheral European economies like Portugal and Spain. As anxiety over Ireland grows, China may engage in checkbook diplomacy yet again.

The seeming warming to other countries is the flipside of a rapidly heating rivalry with the U.S. What was once billed as the ideal partnership is quickly turning into a competition for global influence instead.