China Hates Us -- How Much Longer Will They Back Our Debt-Ridden Economy?

At worst, it could spell the end of America as a superpower and destroy the global economy as we know it.

It started with a joke, but quickly went viral everywhere from the South China Sea to the White House.

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"We hate you guys," Luo Ping, director-general at the China Banking Regulatory Commission, wisecracked in New York last month, speaking of the U.S. habit of issuing trillions worth of the Treasury bills that China still considers safe havens. "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."

That is, nothing much aside from flexing China's economic and military muscle, the latter of which it recently accomplished in the South China Sea when five Chinese vessels aggressively surrounded the USNS Impeccable, an unarmed surveillance ship spying in the internationally contested Spratly Islands.

The Impeccable turned firehoses on the encroaching ships, whose sailors nevertheless stripped down to their underwear and continued to move in as close as 25 feet from the ship.

Laughably terming the nearly naked Chinese display of territorial strength "provocative," a Pentagon spokesman complained that China, America's largest creditor and owner of the world's largest holding of U.S. Treasuries, and its marine vessels' bold actions "violated the requirement under international law to operate with due regard for the rights and safety of other lawful users of the ocean."

After all, the last thing the United States needs from China, a nation bankrolling not just our economic but also our military gamesmanship, is a bunch of naked nationalists reminding us that our empire is in steep decline.

Flex Those Biceps

"China is beginning to show some muscle," explains journalist and economist Danny Schechter, whose 2006 documentary In Debt We Trust examined the capital flows that led us to our worst downturn since the 1930s. "This is why Hillary Clinton was so easy on China in her recent visit, after once popularly criticizing its human rights record. The U.S. is trying to signal to China that our economy is strong, but at the end of the day, the proof is in the pudding. If there is any pudding left."

Schechter's grim assessment is one shared on both sides of the Pacific. Since the Obama administration came to power just as the global economy sputtered to a halt, Chinese Premier Wen Jiabao has repeatedly complained that the world's major economies, especially that of the United States, have been witlessly living and spending on borrowed time and money.

"I think the main reason for this global financial crisis is the imbalances of some of the economies themselves," the premier correctly noted in early February. "For a long time, they have had double deficits [trade and budget deficits] and kept up high consumption based on massive borrowing."

In mid-March, Wen was more forcefully direct: "We have lent a huge amount of money to the U.S., [and] we are concerned about the safety of our assets," he said. "To be honest, I am definitely a little worried."

But how far is his country willing to go to safeguard those assets? If Chin purchases fewer of those Treasuries, or, in the worst-case scenario, holds a nightmare sell-off of those assets, it could ruin the United States economy in ways we can only imagine at this stage of the geopolitical game.

At best, it could dump the dollar into the currency basement as the world follows China's suit and diversifies its reserves in other denominations. At worst, it could spell the end of America as a superpower and destroy the global economy as we know it.

Spice It Up

As the AIG controversy came to a head, and member nations prepared for the G20 conference in London on April 2, the governor of the People's Bank of China, Zhou Xiaochuan, proposed replacing the dollar as the world's reserve currency, using instead what he called a "super-sovereign" currency managed by the International Monetary Fund.

Agreed to by Russia, Zhou Xiaochuan's proposal is but the latest salvo in China's campaign to break the dollar's chokehold on global economics, as well as a brilliant PR maneuver to prime the pump for the G20 meet. The issue kicked up enough dust that President Barack Obama had to publicly rebuke it during a televised prime-time press conference.

Whatever its original impetus, the move has paid immediate returns for the Chinese, if only in the form of an increase in mainstream discussion about the dollar's continuing relevance. It's a worthy subject for a country like China, which is appears bent on reshaping the new world monetary order.

It's also a veiled warning to those who do business with the export powerhouse, which includes most of America's allies and enemies. It's a serious geopolitical concern for Washington when many of those countries begin voicing their own concerns about the dollar right before they all meet at a world conference on the econopocalypse.

"Normally we are very polite with each other," Brazil's President Luiz Inacio "Lula" da Silva explained during a press conference with U.K. Prime Minister Gordon Brown. "But this meeting in London, it has to be a little bit spicy, [have] a little bit of heat." Lula said this after explaining that we got into this mess because of the "irrational behavior of people that are white, blue-eyed, [who] before the crisis looked like they knew everything about economics" but have since "demonstrated that they don't know anything about economics."

The heavy rhetorical fire is aimed with precision. China, Russia and Brazil -- who hold much of our conventional labor and energy futures in their hands -- know good and well that beggars can't be choosers. They know that if we want their help to fund our gluttonous debt and economic machinations, we are probably now going to have to pay for it, in lost wealth and lost face.

The volley is also a clever invitation to Europe, which has consistently asked China to help fund the IMF, to join in on the dollar dogpile.

But even if Zhou's proposal comes to nothing, there's reason to believe that the economies of America and China have already begun to "decouple."

"The global currency system, being detached from a gold standard, maintained its vital credibility strictly on the faith that a particular nation was capable of producing wealth," explains author and columnist James Kunstler, who predicted the current economic depression in books like The Long Emergency. "If you can't produce wealth, or surplus capital, then you can't service debt. So the system of Chinese production and American consumption has reached its terminal limit.

"A reality-based view of the relationship must admit that China knew what it was doing when it bought our Treasury debt to support our ability to buy their products. And America must have known what it was doing when it mortgaged its future. Either that, or neither nation, or its leadership, knew what the hell it was doing, which is a sobering thought."

Obama certainly sobered up after Wen complained about the safety of his nation's American assets. "Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States," Obama announced after a White House meeting with Brazil's da Silva, whose country may be the only one left standing after the smoke clears.

How did Lula manage it? Simple: Solid financial regulation and healthy wealth distribution. (Well, that and the kind of oil deposits that elicit a reported invitation to join OPEC.)

Brazil's leadership transitioning to a more regional economic model is catching on throughout the world and could cause massive headaches for the United States, should China decide to implement its own version of it more fully. In fact, it might already be time to break out the ibuprofen.

Here Comes the Headache

Even the comparatively jocular Luo Ping explained that Chinese banks are more interested in regional mergers and acquisitions than "bottom fishing of financial institutions, particularly in the U.S."

For his part, Wen announced billions in local infrastructure, technology and health care spending in a stimulus package that mirrors the Obama administration's recently passed plan.

Just last week, China blocked a $2.4 billion takeover of Huiyuan Juice, the nation's leading juice maker, by Coca-Cola, citing fears of monopoly and damage to smaller domestic companies. 

Indeed, signs of a strengthening China are everywhere, even as its once-explosive growth suffers under the strain of a greater global collapse. But are America's bonds, literal and otherwise, with the Chinese still as strong as they were? More importantly, are they headed for a rupture?

Perhaps not, argue experts like Nouriel Roubini -- the New York University economist who called out our hyper-real finance disaster long before it was cool -- if China sinks us, its own economy could go down with the bloated American ship.

"China may be on its way to a hard landing," Roubini said last year. "Considering the certainty of a recession in advanced economies and the high likelihood of a global recession, there is now a very high probability that Chinese growth could slow down to 7 percent or even lower in 2009."

Roubini nailed the numbers: The World Bank recently cut its forecast for China's growth to about 6.5 percent. But even the World Bank's regional director for China, the ironically named David Dollar, claimed that "there's a lot of strength in China. On balance, you've got decline in real estate and exports, and then you've got growth in areas that the government can directly influence."

That sobering theme was echoed in later comments from China's central bank adviser Fan Gang, who explained that his country's $585 billion stimulus package doesn't "have a financial black hole to fill, so all [its] money will go to the economy and drive demand."

The Comedown

"If the Chinese don't have confidence in our economy," economist Danny Schechter concludes, "there is going to be hell to pay. The situation is extremely unstable; as the U.S. economy contracts, growing doubts about our ability to manage it rightfully arise. As the situation unravels, and it's going to unravel more, deeper nationalism will come into play.

"Right now, we sort of need each other, but the dollar is in trouble. The Federal Reserve is basically just printing money. But the only thing that backs the currency is faith in the U.S., and when that faith evaporates, look out."

For now, China has reiterated its confidence in U.S. Treasuries, but that may change as the "unwinding" of hyper-real investment vehicles gathers momentum and controversy. When all is said and done, China might just have to pick its economic poison.

"In theory, China could just dump its bonds, but that in itself could trigger an outright collapse of the global banking system, which for now is still going through the motions," Kunstler says. "But I believe that the actual process of broader economic decoupling has already occurred. We're not going back to the relationship we had before. China might theoretically shift some of its huge industrial capacity to other markets, but it is increasingly facing grave resource issues, including peak oil, water and food.

"As for America, at this point it appears to be a choice between functional bankruptcy, or renunciation of debt and hyperinflation, both of which would leave China holding a big bag of nothing. Its holdings in U.S. Treasuries is basically a loss under any scenario."

Scott Thill runs the online mag Morphizm. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.