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

By Scott Thill, AlterNet. Posted April 3, 2009.

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."

See more stories tagged with: china, economy, dollar, deficits, financial crisis, reserve currency, yuan

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

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