It was not the language of diplomacy and disguised meaning. Chinese President Wen Jiabao’s admonition to the American Government: “I want to ask the United States to protect its credit rating, honor its words and ensure the safety of China’s assets”, was not a request it was a lecture and it was a warning.
China’s influence over US economic and political policy is on the rise. This was a public notice from the highest reaches of the Beijing administration. Chinese economic interests do not necessarily coincide with Washington’s. Chinese investment in US debt should not be taken for granted. The Obama administration has an attentive creditor and economic policies inimical to China’s interests will have consequences. China has investment alternatives; the US does not.
China has always reacted forcefully to criticism of what it regards as internal policy matters even when that policy has large external ramifications. Treasury Secretary Geithner’s passing comment during his confirmation hearing accusing the Chinese of manipulating their currency for trade advantage garnered a swift and blunt reaction from Beijing. These comments are not only out of keeping with the facts, even more so they are misleading in analyzing the causes of the financial crisis, said Vice Governor Su Ning of the People's Bank of China.
The Chinese are genuinely worried about the value of their American investments. The US economic policy to spend its way out of recession is worrisome twice over. First there is no assurance and debatable historical evidence that it will be effective. Second the amount of US debt that will be issued to the world's credit markets over the next few years is unprecedented. The potential for inflation and Dollar devaluation cannot be underestimated.
The Chinese are simply saying what is obvious. Confidence in the economic policies of the US government is essential. Every financial crisis teaches the same lesson, without confidence there is no financial system; it is no different for the debts of governments.
A run on the Dollar would be devastating to the value of China’s US holdings. But that was equally true last summer when the Dollar was plumbing historic lows against the Euro. The Beijing government had little to say then but their position has since improved. The desire of the US administration to use the economic crisis to advance its domestic agenda is a political risk. Washington will have to listen to Chinese concerns. For China political power has grown not from the barrel of a gun but from its trade surplus.
The extent of newfound Chinese influence was not stated by the Chinese president but the implications are clear. China is in a far better economic position than the United States. She can afford to stimulate and support her own domestic spending without borrowing from the rest of the world; the US cannot.
An increase in domestic consumption was one of the goals of the current Chinese five year economic plan, and one that had not been met. Domestic consumption has fallen in percentage terms in this five year plan from the prior plan period. Beijing’s new infrastructure and domestic spending will draw in resources, goods and capital from around the world. Because of its size China has the potential over time to create the same type of sustaining domestic consumer economy that had been typical of the United States until recently.
Japan’s export driven economy is facing its worst recession since the Second World War. The United States can offer little help. The US cannot offer an alternative market; its own consumption is falling rapidly. China can. The China market beckons the Australian and New Zealand resource export economies, the middle level assembly industries of Indonesia, the Philippines and Malaysia and Thailand and the developed industries of the West. The more these countries look to China for their economic growth the more Chinese influence will expand in Asia and globally.
China’s new economic assertiveness is the other side of its financial strength. If the profligate governments of the West have to look to China for funding they will have to listen to Chinese concerns. The Beijing rulers understand all too well the dictum of President Obama’s Chief of Staff Rahm Emmanuel and they have no intention of letting this crisis go to waste.