The China Debt Dance
As Barack Obama touched down in China, the American press seemed to settle on a single story line. The president, wrote the New York Times, will be "assuming the role of profligate spender coming to pay his respects to his banker." And the Wall Street Journal highlighted "China's Blunt Talk for Obama," about US economic policy and the "nervousness" expressed by Chinese leaders that "huge U.S. budget deficits will weaken the dollar and slash the value of China's massive foreign-currency holdings."
The karmic symmetry of this state of affairs makes for an appealing fable. The once mighty United States, which for decades used the IMF to impose its will on the domestic policies of developing countries across the globe, is brought low by its profligacy and forced to beg sufferance from the miserly Chinese.
But just a few days here in Shanghai (on a trip sponsored by the China-United States Exchange Association) has convinced me it's bullshit and the Chinese know it.
"There's an old Chinese saying," Yang Jiemian, president of the Shanghai Institutes for International Studies, told me. "If you borrow a hundred dollars, you are borrower; if you borrow a million dollars, you are not borrower." There's an English version of this, which is a bit zippier--"When you owe $100,000, the bank owns you. When you owe $100 million, you own the bank"--and it aptly describes the US relationship with China, which holds approximately 70 percent of its 2.3 trillion foreign reserves in dollars.
"Both the Chinese and Americans are in the same boat," says Yang, whose brother Yang Jiechi is the Chinese foreign minister. "Chinese has always been trusting the United States. We say the dollar is as good as gold. In Chinese we don't say 'US dollars'; we say 'US gold'--meijin."
Now that they've amassed more than $1 trillion, the Chinese can hardly risk precipitating any kind of worldwide sell-off by moving to get rid of dollars en masse. They're like the action hero in the movie who steps on a land mine, hears the click as it engages and then can't move, lest he blow himself up. Furthermore, the Chinese seem intent, at least in the short and medium terms, to continue driving growth by exporting products to the United States (and holding down the value of their own currency), which means they'll continue to amass dollars into the future. In other words, they're stuck with us.
This state of affairs has created some popular disgruntlement in China. "Chinese government is under great pressure" from its citizens, says Yang. "Why do we continue to buy these bonds?" Currency Wars, a wildly successful bestseller by a Chinese Ron Paul figure named Song Hongbing, asks that same question, and argues that the United States is planning to devalue the dollar massively and screw the Chinese out of billions in wealth. (His solution: buy gold.)
But if domestic Chinese concerns about the country's monetary codependence with the United States explain some of the statements of the country's leaders, they don't explain why the US media and commentators seem so intent on giving the story maximum play.
The answer to that, I think, is politics. It's increasingly clear that China has replaced the bond market as the nebulous specter that fiscal hawks will use to justify domestic austerity. In the 1990s Bill Clinton was persuaded by Robert Rubin and others that the deficits he inherited required him to abandon any extension of the welfare state, lest interest rates go through the roof and the economy into the tank. He was urged to balance the budget, which he did, prompting James Carville to quip: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
Of course, we still have a bond market, but the fiscal hawks don't talk much about it these days. That's because despite all the borrowing, interest rates remain low. So instead, fiscal hawks have attempted to outsource their browbeating to the Chinese, often referred to as our "biggest creditor," even though China holds only 22 percent of foreign-held US Treasury securities. (The majority is held domestically.) In June Illinois Republican Mark Kirk bragged during a talk at the Center for Strategic and International Studies that on a recent trip to China he'd told Chinese officials that "the budget numbers that the US government had put forward should not be believed. The Congress is actually gonna spend quite a bit more than what's in the budget, and the healthcare bill probably being the lead driver of additional spending by the Congress." This bizarre bit of self-sabotage makes sense only if you recognize that Kirk is hoping that panicking the Chinese will boomerang back to the States and whack Obama's domestic agenda.
The fact is, giving in to bullying by Kirk, CNBC's Larry Kudlow, New Hampshire's Judd Gregg and the rest of what some have rightly called "the pain caucus" would only further deepen the economic misery in the United States and sour the US-China relationship. "In short term we are very worried about the domestic politics of the United States," says Zha Xiaogang, a fellow at the Institute for Economic Comparative Studies, who focuses on US-China relations. "We can expect the US unemployment rate will stay high, and will possibly cause US domestic political pressure" for what Zha calls "protectionist" measures.
The odd and in many respects dysfunctional US-China relationship was crafted by the elites of both countries and always runs the risk of being undermined by a populist backlash. (That's why groups like the China-United States Exchange Foundation spend money to fly journalists to China to promote "cooperation.") But what is in the interest of the millions of Americans and hundreds of millions of Chinese who haven't had much say in shaping their countries' strange codependence is an economic recovery whose benefits are broadly shared.