The Bonds Of Debt

Some 37 years ago, President Richard Nixon landed in a drab Beijing to end decades of enmity at a time when the US was one of two superpowers. By seeking an alliance with China against the Soviet Union, he elevated Beijing’s global standing. Earlier this week, President Barack Obama arrived in a glittering Shanghai almost with hat in hand. A nuclear power, Mao’s China offered Nixon a strategic card, but its economy, ravaged by decades of Maoist experiments and the Cultural Revolution, was in ruins. The China that welcomed Obama is already America’s biggest creditor and is poised to become the world’s second-largest economy. Demonstrating their new economic muscle, Chinese negotiators at the Apec (Asia-Pacific Economic Cooperation) meeting stalled US demands to revalue the Yuan. Just on the eve of his visit, a senior Chinese banking official put Obama on the back foot by chastising Washington for its poor economic stewardship, which has endangered the world economy. The message that China wanted the world to hear was Obama reassuring his irate bankers that their money was safe and that the US President was coming as a demandeur.


The White House has been sending out signals that it wants China to live up to its great power role. Obama expected China to be a ‘strategic partner’ by taking responsibility on major issues — from climate change to controlling North Korea and Iran’s nuclear ambitions. He also wants China to let its currency float, on which China demurs. But behind the diplomatic smokescreen put out by both sides one thing is clear: for all the sound and fury of their discord, the US and China are inextricably bound together.


Before arriving in Shanghai, Obama explained why the world should not be concerned about China’s rise. He said, “In an interconnected world, power does not need to be a zero-sum game, and nations need not fear the success of another.” Translation: China may be an exporting giant, but in a globalised world it is too interdependent to lord over others.


China’s integration with the world has brought it enormous wealth, but has made it totally dependent on its buyers, suppliers and even large debtors.


China’s global image as the largest creditor ($800 billion) to the US means that Washington is circumspect about pressing China, lest it does not show up at the next treasury auction. The US needs China to continue buying T-bills to fund its burgeoning budget deficit. But equally, China could not do without US consumers, who remain its single-biggest customers, from shoes and clothes to toys and computers. When in the fall of 2008 Americans shied away from their shopping malls, some 20 million Chinese workers were laid off in the country’s export processing zones. China has a vested interest in the success of Obama’s stimulus package, as well as in seeing American consumers return to the malls.


How closely the Chinese watch the US economy became evident in July and now again in Beijing. Chinese closely questioned White House officials about Obama’s trillion dollar healthcare plan and its likely impact on the deficit. China is clearly worried that a growing US deficit will weaken the dollar and devalue its holdings.


At the same time, selling their T-bills is no solution either. The mere hint that Chinese are disposing of their treasuries could start a global fire sale, further weakening the dollar and the worth of Beijing’s dollar-denominated assets. China’s greenback holdings are so large that it has emerged as the proverbial easy lending bank vis-à-vis its borrower Uncle Sam: “If you owe the bank $100, it’s your problem. If you owe $100 million, it’s the bank’s problem.”


Sino-US interdependence is such that despite China’s worry about a sinking dollar it will keep buying US debt. Apart from the fact that no other currency in which China could realistically invest its export earnings offers the depth or the stability of the dollar, China’s failure to absorb some American debt could lead to a rise in interest affecting the economic recovery and effectively China’s work force.


The globalisation that enabled China’s phenomenal rise also constrains it in ways that it clearly does not like. Obama appreciates the interconnected and interdependent nature of our world and the kind of governance it requires. Chinese leaders would do well to come to terms with it as well.