For years, one of the driving forces of the global boom has been China’s willingness to lend Americans the money they needed to buy goods made in China.
The global slump promises to push this relationship to breaking point. Just as US consumers have decided to stop buying – well, anything really – the US needs China’s backing more than ever.
In her trip to China, US Secretary of State Hillary Clinton, tried to stress that the US and China are in this together. “We will truly rise or fall together.” It’s an interesting way to look at it.
But from where I’m standing, the Chinese probably have the upper hand…
America doesn’t want to aggravate China right now
After getting off to a slightly wobbly start, the Obama administration seems to be grasping reality as far as China goes.
US Treasury Secretary Tim Geithner accused China of being a currency manipulator only a few weeks ago, which surprised everyone. After all, China is a huge holder of US government debt. And right now, the US is planning to issue more government debt than ever before. So to put it bluntly, aggravating your biggest funder didn’t seem like a great idea.
And they seem to have grasped that. Ms Clinton’s visit has taken a much more conciliatory tone. The subtext of the whole visit was “please keep buying US Treasuries so that we can afford to pay for all these bail-outs.”
As Ambrose Evans-Pritchard reports in The Telegraph this morning, she told Chinese TV of US government debt: “It’s a safe investment. The United States has a well-deserved financial reputation.” (Reputation for what exactly, she didn’t say).
“We are truly going to rise and fall together. Our economies are so intertwined, the Chinese know that to start exporting again to their biggest market, the United States has to take some very drastic measures with this stimulus package, which means we have to incur more debt.”
The Chinese are unlikely to stop lending the US money
It’s an interesting way to look at things. It’s like turning round to your bank and saying: “if you don’t want us to go bust, you are going to have to extend our overdraft and hope that somehow, we manage to turn things around and eventually pay you back.”
Now to be fair, the Americans do have a point. When you owe the bank £1,000, it’s your problem if you can’t pay. But if you owe the bank £1bn, it becomes the bank’s problem – as recent events around the world have made very clear.
So even although the Chinese could cause serious problems for the US by refusing to lend it any more money, that’s unlikely to happen right now. The Chinese don’t want to spark a run on the dollar, as that would wreck the value of their own dollar holdings.
But at the same time, there’s always the risk that by printing lots more money, the US will simply try to inflate its way out of its debts. That wouldn’t be good for China either. So it’s understandable that Beijing is looking for reassurances that if it keeps buying US debt, it’ll eventually be repaid in money that’s actually worth something.
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It should also be clear to the Chinese by now that the idea of relying on one superpower to fund the country’s export-driven growth is not sustainable. And as you might expect, the Chinese aren’t just sitting on their hands and hoping that that the mighty US consumer will return to health any time soon and then deign to start buying their stuff again. So the country is using this global slump to go bargain hunting for all the things it will need when economic growth eventually starts rising again.
China’s National Energy Administration is apparently considering establishing a fund for the state-owned oil and gas companies to buy up assets and rivals overseas. Beijing has also signed deals worth more than £28bn with countries including Russia, Venezuela and Brazil, reports Richard Spencer in The Telegraph.
This is the nice thing about having money rather than owing it. It gives you options. America might like to present its relationship with China as symbiotic, but the US has reneged on its side of the deal – its consumers are no longer buying enough Chinese goods. So the Americans are now having to convince the Chinese that they’ll eventually get the economy back on an even footing – which is by no means an easy sell right now.
The strong yen isn’t helping the Japanese
However, although the US economy may be vulnerable, the chances of a dollar collapse happening imminently look slim. That’s because the other big buyer of US Treasuries, the Japanese, are in trouble. The economy is in a deep slump, and the massively strong yen isn’t helping at all. That means, says Albert Edwards at Societe Generale, that the “yen is massively vulnerable” to intervention by the Japanese authorities.
And if the yen is driven down by the Japanese, then the yuan – the Chinese currency – is likely to come under pressure too, because no one reliant on exports wants a strong currency right now. Ironically, that may mean the big debtor nation – the US – sees demand for the dollar continue to stay strong. That’s not great news for US exporters – but then, they’re the last of America’s worries right now.
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