China is under fire once again from an American administration desperate to find a scapegoat for the economic malaise in the US. It is no coincidence that Timothy Geithner’s comments are being made now, a mere six weeks before mid-term congressional elections. Hoping to deflect criticism and dissatisfaction by the electorate, loss of seats in congress and mollify US labour unions, he is raising the spectre of the dreaded Yellow Peril.
Another example of clay-footed US foreign policy. Making public statements such as these does not help resolve differences; instead it serves only to exacerbate friction with China.
One can argue that China holds $843 billion of US debt (as of today), and that its economy depends on holding and continuing to purchase US debt to prop up its primary export market. To that equation should be added the $1.60 trillion in US dollar currency reserves China has on its books. That is a tidy sum to be held by a creditor and one would think the debtor would be grateful and be more interested in staying on good terms with said creditor. But no, the US seemingly wants to tempt fate by twisting the dragon’s tail.
As stated, China, at this point in economic development is still very much hostage to the US market but, as its domestic economy grows and, as other South East Asian and Latin American markets buy more from China, that dependence is due to change. And, threats related to revaluing the Yuan could prompt a potentially disastrous financial crisis for the US.
An article of 13 September on the Bloomberg site deals with precisely this issue: “Evidence of strengthening domestic spending in China undermined the case for Premier Wen Jiabao’s government to resist a faster pace of currency appreciation days before U.S. lawmakers meet to address the issue.:”
It also underscores an argument I have often made, namely that contrary to the views of many pundits, if push came to shove, and US levied punishing tariffs on Chinese imports, the Chinese could retaliate by dumping US treasuries.
I quote again from the Bloomberg article:
“If signed by Obama, the legislation could spark retaliation including the sale of U.S. Treasuries by China, Stephen Roach, Morgan Stanley Asia chairman, said last week. China is the biggest foreign holder of U.S. government debt, at $843.7 billion in June.”
As for US currency, China is cutting back on bond purchases after scrapping its currency peg in June, giving it less reason to buy dollars and invest them in Treasuries. China is also turning more to Europe and Japan, purchasing bonds of both nations. In the meanwhile Barack Obama increases U.S. debt to record levels, counting on overseas investors to buy, as he borrows to sustain the U.S. economic expansion. And if they, especially China, do not buy………?
We are already seeing moves by China to distance itself from US assets:
To quote Hu Xiaolian, a vice governor with the People’s Bank of China:
“Once a reserve currency’s value becomes unstable, there will be quite large depreciation risks for assets,” she wrote in an article that appeared in the latest issue of China Finance, a central bank magazine.
“The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system,” she said.
“A diversified international currency system will be more conducive to international economic and financial stability,” she added, calling for greater cross-border use of the Yuan.
So, China would seen to be sending strong signals that it would not hesitate to withdraw support for the US economy, particularly if the US were unwise enough to challenge the dragon in its den.