China and America: a dim sum?
SHANGHAI, CHINA – How is it that the country with one of the poorest populations in the world is the biggest lender to the richest? How can it be that apparently one of the prime agenda items for Mrs Clinton’s Chinese visit was her indebtedness to her country’s indebtedness. Well, welcome to Chimerica.
It’s the relationship that some in America say was the ultimate cause of the credit cataclysm. If it’s got right, soon the world could rebound from recession. If it’s got wrong, there lies a dark abyss of trade wars and even currency wars.
China and America. A trading relationship, monetary marriage and unusual economic embrace that saw a boom that lasted over a decade, a boom that was supercharged when China joined the World Trade Organisation.
US companies and consumers benefited from the astonishing reduction in production costs from a near endless supply of cheap Chinese labour. The fabulous inflow of ‘Sinodollars’ then sent back to the US in the form of huge purchases of US treasury bonds. China kept its currency cheap, perpetuating the export boom, and the US received a cheap funding source for its deficit, argued by some to be a background cause for the subprime crisis.
It was both a huge imbalance, and a fundamental axis of world economics. Now both economies are feeling the pinch and trade tensions are rising. And suddenly it has been noticed that China effectively lends the US $700bn, the largest foreign creditor since the end of last year.
Actually during his election campaign President Obama certainly did notice. During the last presidential debate he answered a question about dependence on foreign oil as follows: “Nothing is more important than us no longer borrowing $700bn or more from China and sending it to Saudi Arabia. It’s mortgaging our children’s future.”
Fast forward to his secretary of state, Hillary Clinton, in Beijing this weekend: “I appreciate greatly the Chinese government’s continuing confidence in United States treasuries.” Not exactly weaning America of the teat of Chinese credit.
Four trillion dollars of extra US government borrowing in the coming years might have something to do with it. The fact that China has been sending some not-so-subtle messages in recent days about its limited appetite for US debt may be more on the money.
The joke in China is that having paid for their own much-needed £400bn stimulus entirely from their own pockets, they do not feel the need to pay for America’s stimulus too.
There is genuine concern here that a likely flood of US government debt will decimate the value of China’s currency reserves. And it can be no coincidence that some of the cryptic uncertainty over buying US debt came in the weeks after the US treasury secretary asserted that China manipulates its currency. China (and India) is also deeply concerned about the “Buy American” provisions in the US stimulus package.
Put it all together and you have political uncertainty around one of the axioms of international finance. Everyone knows that this imbalance will have to be unwound at some point, and it is most probable that it will be done so calmly and healthily. But the chances of a disastrous, protectionist, beggar-thy-neighbour unwind can not be ruled out, whatever the warm words in Beijing.
The US shift in production to China, led to a shift in promissory notes in the same direction. Now China sees a significant shift in power.