China,US deeply dependent on each other
- Source: Global Times
- [08:00 July 27 2009]
- Comments
By Stirling Newberry
Illustration: Liu Rui
The economic relationship between the US and China is now the most important in the world. This has been true in the trade of goods for some time, but now it is true in monetary policy as well. As Martin Wolf of the Financial Times put it two years ago, the party is over for American consumers when Beijing says it is.
The formal recognition of the centrality of this relationship came with the establishment by then President Bush and President Hu Jintao of the Strategic Economic Dialogue(SED) in 2006, now US-China Strategic and Economic Dialogue. The importance that President Obama places on this can be seen by the inclusion of Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton.
While the press often focuses on strategic issues, such as shape of global warming initiatives, following the statements of the respective economic teams puts the present into sharper focus: the US runs a very large budget deficit, and China’s need to stabilize the yuan pushes it to buy dollars, even if those dollar holdings fall in value. Obama’s economic team must not only sell policy to the American public and to Congress, but to China as well. China, for its part, knows that economic contraction means turmoil and uncertainty. For China, the US is too big to fail, for America, China is too big to ignore.
In the last two months, both Geithner and senior economic policy advisor Larry Summers have made statements that make it clear that they understand that China can, effectively, veto US policy initiatives by the expedient of not buying dollars. The sentiments of China’s willingness to invest in the US were brought up directly when Summers appeared at the Peterson Institute recently, Summers issued a warning that the worst risk to long-term growth would be if the US were to suffer a sustained contraction. Earlier this month Geithner took pains to tell China that the US will not further devalue the dollar, forcing Beijing to either buy dollars or face pressure for the yuan to rise. Both men have pressured US banks to expand consumer credit, so that the flow of orders will rise, crucial for the growth of China’s export-led economy.
The tension is clear: China buys resources in dollars, and must buy dollars to keep its exports competitive. Hence, it sees US consumption ambivalently. Americans buy Chinese goods, but also push up the price of commodities. The US welcomes both cheap Chinese manufacturing and the Chinese appetite for US Treasuries, but chaffs at having to shape policy around Beijing’s moods.
America’s emerging “G2” relationship with China, shorthand in international circles for the growing dominance of this strategic relationship, has made India and Russia nervous. The key short-term economic issue for this meeting is how to divide the available global stimulus, and whether the US can convince China that its budget chasm and mounting government borrowing will eventually lead to balance.
The key long-term economic issue is the speed with which China, and to a lesser extent the US, open their capital markets to the other. US investors want to buy Chinese assets while they’re still undercapitalized. China wants to acquire strategic technology in oil drilling and manufacturing. Both nations fear the results of allowing the other too much access. One way to see where that balance is to watch how Geithner responds to Chinese Vice-Premier Wang Qishan. If his statements are glossed over, it will be a sign that the US still sees China as factory floor space and a market for treasuries. If, however, he is portrayed as an equal to Geithner, it will signal an US realization that the Strategic Dialogue meetings are more than media events, and that Beijing’s long term concerns will form part of American policy calculus.
The author is an American macro-economist specializing in the study of currency basis and financial volatility. stirling.newberry@gmail.com
