“Chimerica” refers to the interdependent economies of China and the US from 1996 to 2006. China’s currency control and US borrowing led to economic growth, but also contributed to the 2007 financial crisis and a rift between the two countries.
“Chimeric” is a term used to describe the closely interconnected economies of China and the United States. This term is a portmanteau of “China” and “America” and plays on the word “chimera,” the mixed-species monster from Greek myth. The term was created by economists Moritz Schularick and Niall Ferguson to refer to the unique symbiosis between the two economies from 1996 to 2006. During that period, the economies of China and the United States became so intertwined and mutually dependent that Schularick and Ferguson found it It helps to treat the two nations as two sectors in one huge economy.
The Chimerica model is rooted in China’s dependence on exports to drive its economy and the growing US budget deficit. By keeping its currency artificially weak against other world currencies, China has increased the value of its exports. Manufacturing was a huge part of China’s economy, so this currency control was a major component in China’s enormous economic growth from 1996 to 2006. To stave off inflation, China bought significant portions of US debt in the form of treasury bills. This has also contributed to a policy of savings and capital accumulation intended to cushion the Chinese economy against future financial disasters.
Meanwhile, the US has used the Chinese-provided credit line to keep interest rates artificially low, encouraging US businesses and citizens to invest rather than save. This has also led to an increase in the budget deficit. Money could be borrowed by the Chinese at such low rates that there was little short-term political or economic gain in reducing the deficit or paying down the national debt. As spending has increased and savings have been leveraged into investment, goods and resources around the world have soared in value.
In the years leading up to the 2007 financial crisis, Chimerica was a symbiotic relationship that benefited both participants and drove economic growth in many other countries. China has essentially financed the climate of increased consumer spending in the United States, which has led to higher demand for Chinese imports from buyers in the United States. The Chinese strategy of buying US debt to prevent inflation has also led to the China to build up large stockpiles of US dollars, which has directly linked the savings of Chinese citizens, businesses and government agencies to the value of the US dollar.
Following the subprime mortgage crisis of 2007, the relationship between the two countries began to drift apart. Schularick and Ferguson argued that the Chimeric dynamic set the stage for the US housing bubble by artificially lowering interest rates and encouraging lenders and borrowers to engage in risky behavior. China’s treasury stocks lost some of their stability as the US dollar weakened and the budget deficit widened. The recession has caused Chinese import demands to drop while consumer spending in the US has been curbed. According to Ferguson, this nascent rift in 2007 marked the end of the chimera era.
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