China is challenging the US in the Middle East. Rowenna Davis talks with prominent Egyptian economist, Gouda Abdel-Khalek, about its next moves.
Think of the Middle East as a giant chessboard stretching from Turkey’s European border in the West to Iran’s border with Afghanistan in the East. On this surface, two global powers – China and the United States – are playing out a strategic power game. Theirs is not a traditional military battle over territory but a tactical struggle for control of international capital and natural resources.
Of course the Middle East is not neutral in this game. The region’s 22 countries – and their competing interests – don’t always provide a stable base on which to play. However, the region is united on one point: the need to reduce the international domination of the United States. In China, the Middle East sees an opportunity to do just that.
To understand the two contenders more clearly we need to take a step back from the board. Some 30 years after opening its economy to the outside world, China has just overtaken Germany as the world’s third largest economy after the US and Japan. It is the only country that continues to expand in the wake of the current financial crisis.
Manufacturing has been the engine of China’s continuing growth. Over the last two decades a substantial proportion of China’s goods have been bound for the US. What has been less clear until recently is that this process has locked the two countries into an uncomfortable mutual dependency, with the balance tipping China’s way. With high exports to the US and relatively few imports, China has amassed over $1.9 trillion worth of international reserves; 70 per cent of these are thought to be in US dollars.
Currency countdown
The traditional analysis is that these massive holdings give China a stranglehold over the US. With so much US currency on hand, China’s Central Bank, the People’s Bank of China, could effectively make or break the dollar depending on its decision to buy or sell greenbacks. Add to that the United States’ phenomenal debts and massive balance of trade deficit and you see why many economists still believe that the only thing stopping the dollar from a Latin American-style collapse is China’s continuing demand for it.
But Gouda Abdel-Khalek, an economics professor at Cairo University who has published widely on this issue, does not believe China has the US in checkmate. After all, if China is so powerful, why hasn’t it just pulled out the stops and wiped out its opponent? ‘The fact is that China has a stake in the stability of the dollar. China has been looking for an alternative international currency. But if they push too hard they’ll not only destabilize the dollar; they’ll also erode the value of their own reserves.’
Here is a paradox. The more dollars China piles up, the more wealth it has to lose if the dollar crashes in value. Not only that, but a fall in the dollar would wipe out the competitiveness of China’s currency (the renminbi, whose principal unit is the yuan) in the US, something that even China cannot afford. On a chessboard this is the equivalent of being able to take out an opponent’s key player only by sacrificing one of your own.
A similar bind prevents the Middle East from exploiting its control over the dollar. Since the end of World War Two, oil prices have been pegged to the US dollar and most oil trade is conducted in that currency. If the oil-producing Middle Eastern countries were to de-peg from the US – perhaps by seeking an alternative with China – then the dollar would lose much of its standing as the dominant international currency.
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