Don’t tell the Europeans.
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It would drive the Russians to drink.
The Japanese would lose face if they knew.
As the world begins to emerge from the greatest financial crisis since 1930s, the only bi-lateral relationship in the world that really matters is the connection between China and the United States.
Our cultures and political systems may be as different as night and day. But for the foreseeable future, the two nations are fused at the hip. The rest of the world is simply along for the ride.
China Does Not Seek Our Destruction
Despite the severe downturn, the United States remains the pre-eminent economy. While it may be shaken, the dollar still is unchallenged as the world’s only reserve currency.
The aggregate value of the European Union may be greater and the Japanese economy still is marginally larger. No economy, however, has grown faster or displayed more dynamism than China’s.
For our part, the U.S. is China’s No. 1 trading partner. We can’t seem to get enough of what they’re making, especially for the price.
They may bellyache about their growing indigestion, but the Chinese have a relentless hunger for our debt. China’s foreign currency reserves recently surpassed $2 trillion. Its holdings in U.S. Treasuries reached $800 billion in May, more than double the amount from 2007.
Many Americans suffer from the erroneous misconception that the Chinese seek the demise of the West, and specifically, the United States. Nothing could be further from reality.
It is no longer a zero-sum game where one must prevail over the other.
The Chinese need us, and we need them.
In large measure, the Chinese economy has achieved its unparalleled success through the manipulation of its currency. Despite the rapid growth in its GNP (Gross National Product), the Chinese have kept the Yuan artificially low to keep attracting buyers to their exports.
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Similar to the Japanese in the late 1970s and ‘80s, the Chinese are in a lather about the declining value of the U.S. dollar. Given the enormous level of U.S. debt they control, the Chinese don’t want to see the value of their holdings diminished. Moreover, a stronger dollar keeps the party going for China’s exports.
Why China Is Worried
For the last several years, U.S. delegations have traveled to the Middle Kingdom to curry favor with Beijing. This week, the Chinese have arrived en masse in Washington to check on the solvency of their investments.
At a press briefing, China’s Assistant Finance Minister, one of the senior members of the delegation, bluntly told the assembled journalists that “we are concerned about the security of our financial assets.” In his opening remarks, Treasury Secretary Tim Geithner assured his guests that the U.S. would attain a “sustainable” deficit by 2013.
This is not the first time the Chinese have shown their displeasure with the state of the U.S. economy and the growing federal deficit.
Since the global financial crisis was ignited in the U.S. last year, and the enactment in February of the Obama administration’s $787 billion stimulus program, Chinese officials have expressed trepidation about the prospects for the U.S. economy and the health of their investments.
Back in March, during a rare speech on the subject, Chinese Premier Wen Jiabao openly voiced his government’s growing anxiety when he said, “We are concerned about the security of our assets. To speak truthfully [referring to the U.S.] I do indeed have some worries.”
The agenda for the visit, broadly, includes discussions about strengthening the financial system, cooperating on climate change, trade and confronting the nuclear ambitions of North Korea and Iran. But make no mistake. The only item on the minds of the Chinese is the continued solvency of the United States.
Only last month, Geithner was dispatched to China to quell their misgivings. Apparently the Chinese were not satisfied, and now they want a first-hand look at our books.
No matter how you spin it, the key relationship of the 21st century will continue to be the uneasy partnership that has developed between the U.S. and China.
Although it is unlikely that we will soon see eye-to-eye on issues ranging from human rights to global warming, we have become like peanut butter and jelly; opposite, yet complementary.
Right now, there is no room in the sandwich for anyone else.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
