Why China should listen to Obama

Relations between the US and China have been increasingly strained over recent weeks:

Inching towards a trade war

US President Barack Obama pointedly told Senate Democrats overnight that the issue of a weak Chinese currency had to be addressed “to make sure our goods are not artificially inflated in price and their goods are artificially deflated in price”. Hostility between Washington and Beijing has increased following the US government’s recent decision to approve a $US6.4 billion arms deal to Taiwan. But tensions have been mounting long before that...

...China has thus threatened that any US company involved in the Taiwan arms deal – which includes Boeing, United Technologies and Lockheed Martin Raytheon – will face sanctions.

China is also taking action against what it sees as unfair western protectionism by filing formal complaints with the World Trade Organisation...

... In his State of the Union speech last week, President Obama set a goal of doubling US exports over the next five years – a move which he says will create two million new jobs.

With Europe facing a protracted period of low growth – and even more so that bond markets have started focusing on mountainous levels of debt in the weaker European countries – the US will start looking more closely at China. And the Obama administration will increase the pressure on China to let their currency appreciate against the US dollar, both to boost US exports and to make US goods more competitive in the home market.

This creates a huge paradox. Holding such a vast amount of US govt debt gives China potentially enormous leverage in international affairs in that the US would not want to so lose favor as to tempt China to start dumping their holdings. Yet only 3 weeks ago China's PM expressed serious concerns over the safety of his country's $1 trillion investment in US treasuries:

China's leader says he is 'worried' over US treasuries

So China doesn't want to give the US any excuse to ignore its concerns in that it needs a strong US dollar. It doesn't want the Fed keep pumping more money into the economy or become the principle buyer of its own debt (via the Fed) thus weakening the value of the dollar in the medium to long term. The above article - well worth the read - suggests China might effectively be forced to wait:

During her visit to China last month, Secretary of State Hillary Rodham Clinton publicly assured Beijing that its American holdings remained a reliable investment. On Friday, Mr. Wen neither detailed his concerns about their safety nor said what sorts of new assurances he expected the United States to deliver.

But economists have cited several possible threats, led by the prospect that the dollar’s value will depreciate over time, lowering the value of China’s holdings.

“In the short run, the dollar is appreciating” because global investors see the American currency as a safe haven at a time of crisis, Bai Chong-En, who heads the economics department at Tsinghua University in Beijing, said in a telephone interview. “But we don’t know what’s going to happen in the long run. If the American stimulus package is financed mainly by borrowing, then that may affect the future value of Treasury securities.”

Some specialists also say that high inflation could erode the dollar’s value. Finally, some believe that China’s investment in American debt is now so vast that, should it need foreign exchange in some emergency, it would be unable to sell its Treasury securities without flooding the market and driving down their price.

“The only possibility, really, is that China will have to hold these bonds until maturity,” said Shen Minggao, the chief economist at Caijing, a Beijing-based business magazine. “If you start to sell those bonds, the market may collapse.”

So while issues surrounding Taiwan & Iran, etc., are currently causing a distinct cooling in the relationship, the fact remains: they both need each other. Without China as both a market and an investor, the US is in serious trouble. Serious. Without a healthy dollar China loses out big time.

But tensions keep rising. Will the two manage to make amends? The ball is largely in China's court.

Could it be that the US doesn't believe China will lose face and agree to let it's currency strengthen? Could a deliberate weakening of the US dollar actually be a planned strategy that would enable the US to improve the vast trade deficit with China?

I just can't help wondering why China doesn't do itself a big favor in the long term and give the US a boost by allowing its currency to strengthen in the short term. China is after all, a shrewd operator. The US is, arguably, also shrewd in that China has become so dependent on the continued strength of the US economy. Of course the achilles heel is that China might at some point decide it's in a strong enough position to expand through ties with other nations, while leaving the US to languish...

This issue isn't going away. If anything it is only just beginning:

Is China's politburo spoiling for a showdown with America?

*Anybody think this is important?*

The long-simmering clash between the world's two great powers is coming to a head, with dangerous implications for the international system.

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.

"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.

China's premier Wen Jiabao is defiant...

And you're gunna love the next part -

Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said.

"The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said.

"At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.

Is the Politiburo smoking weed?..

Methinks China may at least be acting unwisely:

...What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.

In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.

We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.

Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

But what about those massive reserves China has amassed? -

The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.

This is catching up with China, in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.

And it seems somebody agrees with me that China needs to start listening to the White House:

As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?

Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win.

Might Obama do the unthinkable and call China's bluff? -

Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers. Adam Smith recognized this too, despite efforts by free-trade ultras to appropriate him for their cause.

So China should stop posturing and soften its stance - for the sake of its own economy.

But what are the chances of such an about-turn? -

China's trasformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in China: a Wolf in the World? you cannot feel at ease with a regime that still covers up Mao's murderous nihilism. He reminds us too that China has never forgiven the humilations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. Handle with care.

China's not listening.

Great thread. This is my take on it the Chinese have paid for a huge military buildup that will be used against them in the end. It is only a matter of time before we reach the point of no return with them and when we do the end of China will soon follow. I feel kind of sorry for them how stupid to pay for you own demise. They are truly screwed on every level and should find an exit strategy that does not involve us putting them back into the stone age. I actually hope they dont and we show the world who the real super power is. It is time for a reckoning. And what better country to put in it's place then China.

reply to post by Subjective Truth


Boy, you don't mince your words do you?! At least there's no ambiguity. I sure hope there aren't too many Chinese in the GM forum.

But this is a very serious topic. Putting China back into the stone age —is that you, George?— would be, shall we say, messy. The only people to benefit would be the good folks who gave us the Georgia Guidestones†. And the military industrial complex...

What appears increasingly likely is that the reckoning you speak of is going to be played out in economic terms, be it trade barriers/sanctions or a full-blown trade war. And it may only be weeks away.

Of course once you start down that path history doesn't smile kindly on ideological enemies who act in ways that damage each other's economic interests. Conflict by proxy - and even worse - often follow.

In days of yore they had this eccentric idea that conflicts of interest could be addressed via diplomacy. Of course in our day things have moved on...



† Hint: "Maintain humanity under 500 million," etc.


[edit on 15/3/10 by pause4thought]

reply to post by Subjective Truth


Oh, please. That "superpower" thing again. You can't even defeat men in caves.

Originally posted by eldard
reply to post by Subjective Truth

 

Oh, please. That "superpower" thing again.

You can't even defeat men in caves.

That would imply that they are actually trying. They are doing nothing more than feeding the war machine.

Originally posted by pause4thought


This creates a huge paradox. Holding such a vast amount of US govt debt gives China potentially enormous leverage in international affairs in that the US would not want to so lose favor as to tempt China to start dumping their holdings.

Let them dump it. That act would break America's nose but would also break China's (the communist party) back. The currency disruption will throw millions of Chinese workers out of work and into spreading protests. The turmoil in China would render useless those nice factories that investors threw their money into in order to screw the American economy.

Chinese products would be made expensive, then would be made into a pariah. Millions of jobs would move back to the U.S., Europe, Philippines, Thailand, Australia, or whatever place lost jobs so investors could make money off cheap labor and currency manipulators.

The Chinese government and greedy investors are a huge reason why many countries are suffering economically. This is not just a U.S./ China thing but only the U.S. could break the scheme. Sure it will hurt in the near term but long term would be very beneficial for many countries.

The question is, will the U.S. government turn its back on Wall Street lobbyists and do the right thing?

reply to post by wutone


Your logic holds up very well.

But could you imagine the fallout? It would be Cold War II.

The ramifications in terms of how global trade operates would be stupendous; frankly mind-boggling. On the other hand the need for the redevelopment of industry at home (or at least within partner nations) would provide enormous opportunities for entrepreneurial dynamism, not to mention massive increases in demand for labour. Lots of big positives. But it's not a win-win scenario. The upheaval, the outright turmoil would be fraught with dangers for the general populace.

And don't forget the race for secured oil supplies. Central Asia would become the scene of ever-more bitter proxy wars barring the much-needed diplomacy mentioned above. Which in turn would feed the arms industry.

I don't like the sound of this.

Are there any national leaders capable of steering a safe course through such waters? People with as much concern for the wellbeing of the general populace as the size of their ego/military.

Well, well, well; things seem to be hotting up:

Paul Krugman, nobel-prize winning American economist, wants to start a trade war with China

When the self-proclaimed "conscience of liberal America" and a one-time free trader to boot starts arguing for protectionism, you know that things have come to a pretty pass. But that's what's happened over the past week.

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent "surcharge" – he refuses to use the more descriptive term of "import tariff" – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he's now said it so often that you have to believe he's serious.

What he's advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman's naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response...

The proposed 25% tax definitely looks over the top & would undoubtedly damage China in a way that would in turn come back to haunt the US. Interesting that such a drastic solution to the current impasse should come to the fore, though. Rough waters definitely ahead.

So I take it you Americans want the Chinese to have greater spending power so they can buy more resources like, say, oil?

Excellent thread.

Interesting times ahead.