On Friday, China’s prime minster offered the United States a very public reminder that the flip side of being too big to fail is being too indebted to keep calling all the shots. Wen Jiabao put in this way (NYT translation): “President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”
This is not really a proper subject for worry, as Dean Baker points out: The Chinese already know they’re going to lose a lot of money in the long term, when the eventual recovery drives up the interest rate on U.S. Treasuries. They also know that they can’t afford to stop buying U.S. debt or sell off what they have accumulated, lest they crash the dollar–not only devaluing their U.S. debt but smashing the world’s biggest consumer economy.
This dynamic more or less explains the trajectory of U.S./China relations of late, including, notably, Secretary of State Hillary Clinton’s hat-in-hand sales pitch on behalf of U.S. Treasuries during her trip to China last month. Not to mention the bitter comments a couple of weeks earlier by a Chinese central bank official visiting the U.S., Luo Ping, which were reported in the Financial Times but received almost no attention in the U.S. press:
Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion… We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
Getting back to the prime minister’s remarks last Friday: “The news reporting on his comments,” Baker concludes, “should be asking why he is complaining about the risk of losses that he knows are virtually certain.” The popular press explanation is that China is angry about being consulted so little on the G-20 conference, or that it’s playing gotcha with Treasury Secretary Tim Geithner, who accused China of currency manipulation back in January.
There may be a simpler explanation. It seems likely that China wanted to tell America that there are limits to the ability of debtors to dictate terms to creditors, and to remind us that there’s a reckoning ahead of a sort that the United States is very accustomed to imposing on others through the IMF and World Bank, and not at all accustomed to facing. It used to go by the name of “structural adjustment,” which meant high taxes, domestic austerity, and stern to attention to debt for the afflicted nation. Or, as it was put in a New York Times story yesterday,”‘We should be worried,’ [Moody’s chief economist Mark Zandi] said on Fox. ‘Half of all our Treasury debt is purchased by foreign investors.’ He said that this underscored the need to aggressively trim deficits once the economy stabilizes.”
Of course there will still be incentives for China to be temperate in applying the screws to the United States; crack down too hard and you discourage U.S. consumption, which is hardly in China’s interest as an exporter. But the point is that how the problem gets handled will be up to China ultimately, and Wen wanted America and the world to remember as much.
I think that’s the real answer to Dean Baker’s question.