The Rise of 'Chimerica': Two Superpowers Take on the World

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On two occasions, Chinese fishing boats have stopped an American spy ship near China's Hainan Submarine Base. Feelings of mistrust were further fueled by a Chinese general's announcement that Beijing will need permanent naval bases in the Pacific in the future.

Singapore's "minister mentor," Lee Kuan Yew, a wily veteran of Asian politics, summed up the situation: "The size of China makes it impossible for the rest of Asia, including Japan and India, to match it in weight and capacity in about 20 to 30 years. So we need America to strike a balance."

In China, though, Lee's comments drew anger. And Chinese politicians have their own reasons for being skeptical. They suspect the US of having a single goal in mind -- impeding China's "peaceable advancement" and forcing it to accept Western values like democracy.

Keeping the Yuan Down

Beijing checks all messages from the US carefully for signs that they serve the goal of "keeping China down." Is this why, for example Washington is pushing so insistently for the Chinese yuan to be revalued? American economists say the Chinese government keeps the exchange rate on its currency, also called the renminbi, so low expressly for the purpose of artificially increasing the price of American imports and making Chinese exports especially cheap -- and that this costs the US a great number of jobs.

Beijing responds that the accusation is unfair, since many American companies also manufacture their products in Chinese factories. If prices rose because of a stronger yuan, those companies would suffer as well.

But in the US, calls to protect domestic businesses against Chinese competitors are growing louder. Some economists now extol the advantages of protective tariffs, where before they preached free trade. China "follows a mercantilist policy, keeping its trade surplus artificially high," writes Nobel Prize winning economist Paul Krugman. "In today's depressed world, that policy is, to put it bluntly, predatory." The US, for its part, has slapped high tariffs on imported car tires and steel pipes, in a bid to protect domestic industry from cheap Chinese imports.

China "won't give in to any form of pressure" about revaluing the yuan, Chinese Prime Minister Wen Jiabao stated coolly at the beginning of the year. Communist Party leaders don't deny, though, that China's undervalued currency hands them advantages in international trade. But they feel justified in using these advantages.

The "American elite" has "no idea" what fatal consequences a revaluation of the yuan could have, says political commentator Liang Jing, adding that it would lead to a collapse in Chinese exports and "cause a worsening in domestic income distribution."

Desire for a Stronger Voice

What that means in plain language is that Chinese factories would need to lay off many workers and the divide between rich and poor would quickly grow wider -- potentially plunging the country into social unrest.

And if the Chinese government were to start allowing money to flow freely across its borders, something Washington is also pushing for, it would mean an "unprecedented exodus" of capital from the country, the commentator says.

When Zhou Xiaochuan, head of the People's Bank of China, called for the US dollar to be replaced in the long term as the world's reserve currency, he wasn't just contributing to discussions about the global financial crisis. He was also sending a signal: Beijing politicians plan to have a stronger voice in bodies such as the International Monetary Fund. They don't want to leave the playing field completely to China's rival on the other side of the Pacific.

Above all, China wants to prevent the US from printing too much money to stimulate its economy. Inflation would cause the dollars China has invested in the US to melt away like ice in the sun.

Marriage of Convenience

With fears over the balance of power in the Pacific, an impending trade war, the dispute over the yuan, American armament supplies to Taiwan, and a possible meeting between US President Obama and the Dalai Lama, who is detested in Beijing, it looks like the US and China have some hard times ahead of them.

What will happen to "Chimerica," that economic marriage of convenience? The sense that it would be better to dissolve the forced union sooner rather than later is growing within China's Communist Party. Financial managers within the party are already exchanging long-term US Treasury securities for more short-term securities.

Sooner or later, Chimerica will come to an end. The real question is whether the former partners will be able to live peacefully with one another -- or if the divorce proceedings will turn acrimonious.

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• Part 1: Two Superpowers Take on the World
• Part 2: 'We Need America to Strike a Balance'