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November 20, 2009
President Obama didn't get much from the Chinese on his inaugural state visit as part of his first visit to Asia with respect to the law on human rights, exchange rates, sanctions on Iran, or climate change.
There is little point in the US getting the stick out as many members of the US Congress are demanding, since China is the US's creditor.The temptation in the US is to lash out at a totalitarian China for predatory trade policies looks to be very tempting for members of the US. Congress. China is anything but a faled dictatorship.
Obama's Chinese hosts were at pains to remind him that China is now the US’s creditor-in-chief and so there was a backdrop of lectures about credit bubbles in the US the urgency of raising US interest rates and narrowing its budget deficit. The debtor needed to do better as it were in getting its house in order.
That would not go down well with members of the US Congress who see the US as the superpower, are unhappy about the need for the US to more multilateral and consultative out of necessity and the economic gravity shift to Asia. The US, it appears, continues to evade the issues raised by China’s growing power rather than address them.
As Alan Kohler says in Business Spectator:
China has become such a vast creditor to the US as a result of that bubble that it now calls the shots. The US is not quite in receivership with its banker in full control, but this week’s excessively polite, uncomfortable visit had all the hallmarks of a distressed debtor's trip to the bank for a difficult meeting.
America relies on China to finance its trade deficit, whilst China needs the US to buy its goods in order to keep export-led growth on track. However China also owns over a trillion dollars in U.S. assets, the U.S. economy is on life support, and the American military is mired in two losing wars. America has a few problems it need to fix. The Obama administration is learning to manage an empire in decline.
This requires working with a China that refuses to bear the burden of the US's problems and whose economy is geared to production, not consumption. China wants to become the world's preeminent producer nation. China's export policy is really a social policy, designed to maintain order as tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work.
The US does have a point about the revaluation of the RMB exchange rate. As Paul Krugman points out in the New York Times. He says that the problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways. Though most nations try to keep the value of their currency in line with long-term economic fundamentals China is the great exception.
Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities. And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
Krugman says that we can expect to see both China’s trade surplus and America’s trade deficit surge leading to a scenario in the US of soaring U.S. trade deficits and Chinese trade surpluses juxtapositioned with the suffering of unemployed American workers.
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The Chinese can lecture until the pandas come home! The fact remains that the US of A... just like Bear Stearns, General Motors, Freddie Mac, Merrill Lynch, AIG, Citigroup & Co... is simply too big to fail.
It's a very unhealthy relationship.