The Communist Party congress opened on Thursday, with Xi Jinping  -  the man most likely to become China’s new president – in attendance. Author Martin Jacques, says that following the financial crisis there was a fundamental power shift that signalled the end of the global dominance of the Western states. In his book, When China Rules the World, he writes:

The 2008 financial crisis marked a fundamental shift in the relationship between China and the United States. Nothing could or would be quite the same again. The management of the US economy was revealed to have been fatally flawed, a lightly regulated financial sector almost allowed to shipwreck the entire economy. In a few short months, the crisis served to undermine a near-universal assumption of American and Western economic competence; in contrast, China’s economic credentials have been considerably burnished.

But this was only the beginning. Immediately after the financial meltdown, the American economy contracted and when it began to grow again, it was at a very slow rate. The Chinese economy, on the other hand, confounded expectations and continued to expand at a barely reduced rate.

Financial crisis

The financial crisis raised the curtain on a new and protracted period of painfully low growth and greatly reduced expectations in the West, with the American economy – like its European counterparts – facing the prospect of years of austerity, with swinging reductions in both government and personal expenditure, combined, for Americans at least, with the urgency of greatly reducing its trade deficit.

Burdened by sovereign debt crisis in Greece, Ireland, Portugal, Spain and Italy, the European integration project threatens to unravel, condemning the euro to oblivion in the process. Meanwhile the Western economies continue to teeter on the brink of another recession, with a further banking crisis and a full-scale slump not to be excluded. In contrast, the Chinese, buoyed by huge foreign exchange reserves, large trade surpluses and a high level of savings, can look forward to many years of fast economic growth. All this adds up to an extraordinary and irreversible shift in power from the West in general and the United States in particular, to China.

Shift in power

Neither the American nor the Chinese government has admitted to this shift in power – on the surface, at least, it has been business as usual. Neither government has come to terms with what that shift might mean. This is understandable. Relations between the United States and China have been so unequal for so long that the idea of the United States being obliged to treat China as an equal is still anathema.

For the Americans, the adjustment will be painful.

But the Western financial crisis has transformed China’s situation and opened up quite new possibilities. There has already been a subtle shift in Chinese policy. The driving force of China’s growing influence as a global power remains its rapid economic expansion. The world has never seen its like before. Alas, much of the world, particularly the developed countries – the United States, certainly Japan, and perhaps above all Europe – find it almost impossible to grasp either the nature of this transformation or its speed.

If the United States was the architect of globalisation in the 1980s and 1990s – since 2008, China has come to assume that role. A new Chinese-driven and Chinese-moulded globalisation is emerging. What are its key characteristics? Undoubtedly the most important is trade. In 2011 it became the world’s top manufacturing country by output, bringing to an end the US’s 110-year reign in that position. China’s financial power, combined with its largesse, is shifting European attitudes. Whereas southern European countries like Spain, Italy, Portugal and Greece had previously been far more concerned than their northern European counterparts about the threat of Chinese competition for their labour-intensive industries, they are now increasingly desperate to attract Chinese investment.

China is alternative to IMF loans

Similarly, central and eastern European nations like Bulgaria and Hungary are becoming more dependent on Chinese funding as previous European sources have tended to dry up; as a result, Chinese loans are now being seen, as in the case of many developing countries, as an alternative to European or IMF loans. China’s new found strength was vividly illustrated in October 2011 when the European Union sought large scale Chinese financial assistance to support its bail-out proposal for the euro. Predictably, these developments are affecting Europe’s ability to speak with a coherent voice on China, with disparate national interests pulling in different and often contradictory directions.

The case of Europe shows how Chinese financial muscle has the potential to influence governments and even shift alignments not only in the developing world but also in the West.

When China Rules the World By Martin Jacques is published by Penguin Press.