Blog : 2 January 2017 ("Chimerica". BOP says it all)

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In today's blog we provide users with an interactive map of the world showing the story of of "Chimerica". Or China and America. We will look at how these two countries' Balance of Payments (BOP) levels dominate world trade. And wonder if one would be able to exist without the other today?

BOP:2008

So what is BOP? It is basically a record of all transactions between a specific country and the rest of the world. It takes into account all money that flowed in and out of the country for the purchase and sales of goods and services, financial instruments such as shares (and dividend payments of shares) and bonds etc. Its made up of two accounts which is the current account and capital account. Capital account deals specifically with financial instruments while the current account deals with everything else. So what do countries around the world's BOP look like? The map below shows various countries BOP for 2008 (in million US dollars). Where it is at it's reddest, the country owes the rest of the world the most(or the most amount of money flowed out of that country). And the greener it get's the more money has flowed into the country in question or the more money the country is owed.
From the map it is clear the USA owes the rest of the world the most amount of money (or paid the world the most in net outflows of cash.. Such as dividends and interest), with their BOP being by far the biggest negative. And China in stark contrast to that of the USA had the biggest positive BOP of all the countries included in the world map above. And this brings us to our acronym "Chimerica". China and America. Can the one survive without the other?

The USA is the biggest consumer market in the world, and China the biggest manufacturer of consumer goods. So the USA buys cheap manufactured goods from China, and China gets to offset there massive production capacity on the US market. And it's because of this symbiotic relationship that we see the picture we see above. USA constantly pays China (mostly) for cheap imported goods. Benefit for the USA is cheap imported goods (which helps to kee inflation in check), while China can keep their factories running at high capacity.
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​So what did things look like in 2015?

​BOP:2015

Well it was pretty much more of the same, with the USA having the biggest negative BOP value, and China the highest positive BOP value.  Now let us head off on a tangent here. Economic theory would dictate that the USA dollar should weaken until such a point is reached where their exports equals their imports (as dollar weakes US exports become cheaper for other countries and it becomes more expensive for the USA to import). But the US dollar has not seen such a weaking in their currency? Well firstly the BOP includes more than just trade in goods and services, there are financial flows. A large amount of US shares or foreign held, so dividends flows to other countries outside of the USA. The same for US bonds etc.
Another reason is the fact that most commodities are dollar based. So there is always demand for US dollars. This helps support the dollar as there wil always be a need for it. And the USA dollar is seen as a safe haven. When markets perceive any form of risk on world markets, everyone flocks to the dollar. Supporting it's currency even more. Is this sustainable? No not really. But this a bubble we will in all likelyhood never see pop. The US will keep owing the world money, their currency will always be strong (stronger currency means their foreign debt is cheaper to pay off in Dollar terms) and things will keep going the way they have been. As our maps show, there was hardly any change from 2008 to 2015. So why would things change now. "Chimerica" will stay long in to the future. We just wonder who will upset this apple cart? India maybe when they rise to become a true global super power?

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