GLOBALISATION has produced structural imbalances in the world economy. Asia produces, America consumes. Asia lends, America borrows. Asia exports, America imports. Before discussing how this situation might unwind, it is worth spelling out who gains from this arrangement. The overwhelming beneficiaries have been us capitalists and Western consumers.

America has benefited in two ways. First, there is a mismatch in the type of investments flowing in each direction. Asian investors have generally put their money into long-term American debt, which provides a low rate of return. American investors have built factories and call centres in Asia, which provide a high rate of return. Second, there is the tendency of the dollar to decline against Asian currencies; so even where an Asian investor is earning a decent profit, once that is translated back into the home currency in Japan or China, the profits don’t look too good.

Profits flowing back to America, meanwhile, get an extra kick.

Western consumers have profited because a glut of Asian savings, offered through the banking system at low interest rates, allowed them to finance debt-driven lifestyles. And, until the mid 2000s, the impact of Asia’s export-led growth was to lower the price of everything you wanted to buy, from training shoes to television sets and computers.

When they discussed the unwinding of these global imbalances, policymakers usually considered three broad options: the dollar falls dramatically; Asia develops a mass consumer market and invests more at home; or there is a controlled switchover managed by the International Monetary Fund (IMF), involving small tweaks in both directions over a long time.

During the financial crisis, the initial moves have been contradictory. As American growth slowed, so too did its trade deficit with the rest of the world. But when the financial crisis erupted, the dollar strengthened against rival currencies, rather than falling. It is too soon to tell where this is going, but in the end the outcome is in the hands of Asia, and above all China.

Chinese policy is to peg its currency to the American dollar, allowing a tiny rise in the value of the renminbi over time. To change that policy, and allow a huge fall of the dollar against the renminbi, would be a huge act of self-sacrifice by China and a signal that it intends to move away from an export-led strategy towards developing its home market.

Many academic discussions of the imbalances tend to assume that America, or the IMF, would in some way dictate to China the course of rebalancing. It is now clear that the dictating will be done in the other direction. China has already unleashed the world’s biggest state spending programme in response to the crisis, pitching 15% of its GDP into a stimulus package in November 2008. But creating a mass consumer market in China to buy the goods that were once exported to America and Europe would involve huge social change in China. Put simply, it would involve turning Chinese workers from the low-paid wage slaves of the world into the consumer spenders of the world. That would mean redistributing wealth in China away from the new elite to the urban poor.

All this makes the academic literature on the global imbalances look a little otherworldly. Economists tend to say things like “China will have to do X and America Y”, as if every country is represented by a single player. Actually we live in a world of social classes as well as countries. The Chinese workforce is getting stronger and more militant. Meanwhile, the workforce of the G7 countries is, for the first time in a generation, facing unemployment and recession.

In short, it now looks likely that the unwinding of the global imbalances will be disorderly rather than orderly. The $196 trillion in the finance system represents a claim on four times the world’s output. It is a claim on future profits that may not materialise at all – and on future taxes paid to service national debts. We know already that maybe a quarter of the world’s financial assets have been wiped out in this crisis. But the way the rest of the wipe-out happens will be affected, above all, by currency and capital movements.

A 25% fall of the dollar, envisaged in most academic studies of the global imbalances, would wipe out a quarter of China’s foreign-exchange reserves and turn the profits on all the capital invested by Asians into America into losses. But if the dollar is not allowed to fall against other leading currencies, then China’s workers have to become the new big spenders of the world, and a redistribution of wealth is on the cards that will shatter the social harmony pursued by the present administration.

The second contradiction is the sheer scale of the national debts being accumulated by countries that operate on the Anglo-Saxon model: $10 trillion in America; £1 trillion in the UK. Twice in post-war history, America has used an aggressive devaluation of the dollar to transfer the cost of its national debt to other countries: in 1971, with the end of Bretton Woods; and the 1985 Plaza Accord, when Germany and Japan were persuaded to let their currencies rise against the value of the dollar. Any attempt to do this for a third time, unilaterally, will provoke an economic clash with China.

A third problem concerns who will bail out the crisis-hit emerging markets. The IMF’s $750 billion – with $500 billion announced at the London G20 summit – was won with a pledge of greater influence for China and the emerging markets within the IMF. China and Russia have bigger reserves but they, together with much of Asia, have zero affinity with the IMF. It is likely that China will be called on to play a global financial role quite soon if the resources and influence of the IMF run out.

In short, the crisis has dealt China, together with the other emerging-market giants, a strong hand. It is probably the only country that can power the world out of recession; yet to do so it must enrich its own workforce. Its willingness to advance capital – either by lending to governments or by buying up stricken banks – will depend on how far it thinks America is prepared to let the dollar slide. Finally, China is in a position, on its own, to dwarf the IMF in the bailout of stricken economies in its diplomatic orbit, should it wish to do so.

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