Financial Cold War: A View of Sino-US Relations from the Financial Markets
By Brian Wong
The escalating tensions across the Pacific are precipitating a phenomenon that, prior to the election of Donald Trump, was largely unthinkable: the decoupling of the Chinese and U.S. economies.
As noted by finance and international relations expert James Fok, to describe the growing antagonism between Beijing and Washington as one of a new “Cold War” may be an exaggerated misnomer that does not do justice to the complexity and extent of ties involved—after all, China remained the third largest trade partner to the United States in 2021.[1]
Hence despite the eponymous reference, Fok’s Financial Cold War: A View of Sino-US Relations from the Financial Markets offers a historically rooted, rigorously researched, and—for the most part—adeptly argued analysis of this complex relationship, without resorting to the simplistic caricature of a “New Cold War.”
The author seeks to reconcile two seemingly contradictory phenomena: (i) Beijing and Washington remain interdependent, apparently generating substantial mutual gains; and (ii) this mutually beneficial relationship is increasingly blamed as a significant source of the domestic malaise that, in turn, is driving political demands for decoupling and divergence.[2]
Fok served as the Head of Group Strategy to the Hong Kong Exchanges and Clearing Limited (HKEX). A veteran in the financial industry, he had a ringside view to the ebbs and flows of what remains by far China’s most dynamic and international financial stock exchange.
The book is split into three parts: first, an outline of the financial history of the United States and China from, respectively, the Reconstruction period and the Ming dynasty to the present day; second, a robust discussion of the dangers and pitfalls of the modern financial system—culminating with a reconsideration of the causes of the Global Financial Crisis; and third, a riveting yet somewhat brief presentation of Fok’s core positive thesis that Sino-American relations are best interpreted through lenses of financial asymmetries and flawed management. The breadth of issues surveyed, range of sources (including first-hand, personal ones with distinct insights), and sharp prose certainly render the book an excellent read for laypersons, though they also lead to an occasional lapse of focus as readers are taken on detours with somewhat ambiguous, incomplete upshots.
Holistically, the book argues that contemporary Sino-American tensions can be traced to distinctly financial roots. On the American side, Fok cites the Triffin dilemma, which argues that a country’s currency cannot serve as the world’s default reserve currency without that country incurring a trade deficit, driven by the inflation of its exchange rate.[3] America must continually encourage uptake of the U.S. dollar to preserve its global financial reach. In so doing, it sacrifices its exports’ competitiveness.
There exist further elements to the American story, of course. Domestic policies such as regressive taxation and a skewed government spending regime that targets the military, as opposed to key infrastructure, have paved the way for a deeply lopsided growth pattern. The argument—reminiscent of one that is raised by Klein and Pettit—is that state allocation of resources has played a pivotal role in disproportionately rewarding the wealthy, at the expense of the rest.[4] The inevitable question is how much can domestic malaise be attributed to financial imbalances, and how much to regressive domestic policy?
On the Chinese side, the state has been a primary beneficiary of the careful, state-managed market liberalization reforms undertaken by leaders such as Deng Xiaoping, Zhu Rongji, and Jiang Zemin.[5] Yet such seismic changes also disproportionately favored industries and firms that had the most to gain from financial capital and heightened liquidity, under elaborate state handpicking and multinational financing schemes. The upshot was a China increasingly proliferate with socioeconomic inequalities. Indeed, to the extent that President Xi Jinping has deemed it necessary to reverse course through vocal calls for “common prosperity.”
The result? Fok posits that domestic inequalities within China and America have resulted in a sharp, reactionary turn towards populist nationalism. The huge financial imbalance across the Pacific also left many a policymaker in Beijing and Washington uneasy about the status quo—the former was left vulnerable to American monetary policies, whilst the latter was unable to devalue its currency easily to support exports and lessen debt.[6] Fok has taken such seemingly anodyne conceptual blocks in economic discourse and crafted an intuitively and theoretically compelling account.
Fok’s meticulous attempt at joining the dots—between financial imbalances, declining competitiveness of exports in America, an asymmetrical dividing-up of spoils in both sides of the Pacific, and the resulting turn towards militarism and nationalism—is both imaginative and impressive. In particular, tracing the evolution of policymakers’ institutions, practices, and norms is immensely useful in shedding light on the histories that inform contemporary key players in their decision-making.
Yet it is also such conceptual ambition that poses a fundamental weakness in Fok’s methodology. Where Financial Cold War falls short, perhaps, is that it does not provide much statistical or otherwise rigorous testing and verification of the causal hypotheses on offer. To blame the Triffin dilemma and historical evolution of the Bretton Woods system for the inequalities plaguing America today, would require perhaps more substantiation and explanatory legwork in accounting for where alternative solutions to inequality are systemically constricted, how complicit actors (e.g., the military-industrial complex, Wall Street, and laissez-faire bankers, perhaps) fomenting inequalities have stood to gain from the U.S. dollar’s dominant position abroad, and why the resentment of the working class has been discharged through China, the new “bogeyman” in American politics.
Similarly, the gap of China’s dependence upon the U.S. dollar for international transactions, and the populist pressures confronting the Communist Party of China, remains one that Fok does not quite explain, despite his impeccable devotion to chronology and details. Now, Fok does delve into the deeply inegalitarian nature of the Chinese taxation system, the suppression of domestic consumption to prop up savings and thus investment, which—coupled with the stifling restrictions pertaining to the hukou system—hurts Chinese savers.[7] This is fair, but the problem with these explanations is that they do not stack up in explaining how Chinese dependence upon the U.S. dollar induces these political pressures: if anything, it is Beijing’s aggressive privileging of investment and (cheap) export-driven growth that causes both its voluntary dependence upon the U.S. dollar (though some recent signs suggest that policymakers are contemplating Renminbi internationalization as a prospective path forward) and suppression of domestic consumption at large. These intermediary explanations amplify, but do not account for the primary causal link between currency dependence and political pressures upon the Party.
Fok does not hold back in candidly outlining what he takes to be fundamental misconceptions about Sino-American relations. He argues the bilateral relationship is less defined by ideological disagreements than by material needs (though we may object that the framing of which and whose material interests matter remains an ideological exercise). The way forward rests not with the pursuit of short-term financial self-interest, but with the employment of multilateral institutions in devising a mutually agreeable currency solution. He writes with the seasoned confidence of someone who can speak to the grievances of both East and West (Fok speaks English, Mandarin, and Cantonese fluently). He calls upon us to eschew essentialism in favor of pragmatic, win-win thinking.[9] Fok presses for Beijing and Washington alike to contribute genuine leadership to the bilateral relationship and asks that engagement across civil society and individual business-to-business levels be maintained diligently by both sides. Bold, and gutsy to argue as such given the zeitgeist.
To the chagrin of the impatient, perhaps, the book does not quite sufficiently delineate how his proposed solutions—e.g., Special Drawing Rights, rebalancing reserve holdings, keeping the system as it stands but compensating the United States in supplying global liquidity—can be taken forward and implemented.[10] It invites us to contemplate the question on our own, drawing upon the above principles for guidance and reference. Indeed, some of us might even deem this a shirking of authorial responsibility. Isn’t the million-dollar question, how do we get out of this mess? This is a question that perhaps Fok could answer, in a separate book.
Rectifying the financial imbalances between the United States and China requires goodwill on both sides. This, in turn, demands a change in mindsets and acknowledgment that the visceral gains to be reaped respectively from dollar dominance, and China’s continued engineering of its currency, cannot last for long unless a compromise between interests is struck. Fok’s work is a must-read for policymakers and laypersons alike.
About the Author:
Brian Wong Yue Shun is a DPhil in Politics candidate and Rhodes Scholar (HKSAR, China, 2020), at Balliol College, University of Oxford. He is a political theorist by training, though also writes extensively on Chinese foreign policy and Sino-American relations. He founded the Oxford Political Review and the Oxford Policy Advisory Group, and published Metamorphosis (2021), which explores the role played by Hong Kong and track-II diplomacy in navigating fraught Sino-American relations.
Endnotes
1. U.S. Census Bureau, “U.S. International Trade Data — Foreign Trade,” February 2022, https://www.census.gov/foreign-trade/data/.
2. James Fok, Financial Cold War: A View of Sino-US Relations from the Financial Markets (Hoboken: Wiley, 2021), p. 12.
3. Michael Bordo and Robert McCauley, “Triffin: dilemma or myth,” Bank for International Settlements Working Papers no. 684, December 2017, https://www.bis.org/publ/work684.htm.
4. Matthew C. Klein and Michael Pettit, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace (New Haven: Yale University Press, 2020).
5. Fok, Financial Cold War, p. 195-210; see also David Zweig, “China’s Stalled ‘Fifth Wave’: Zhu Rongji’s Reform Package of 1998-2000,” Asian Survey vol. 42, no. 2, March/April 2001, p. 231-247.
6. Fok, Financial Cold War, p. 280-288.
7. Fok, Financial Cold War, p. 348.
8. Bruno De Conti, “The Internationalization of the Chinese Renminbi: Firm Steps, But a Long Road Ahead,” E-international Relations, November 24, 2020.
9. Fok, Financial Cold War, p. 360-368.
10. Fok, Financial Cold War, p. 354-355.