How China Holds the American Economy by the Balls

On May 1, China popped the cork on Expo 2010 in Shanghai, a months-long international celebration signifying the ascension of the city, and thereby its parent nation, as a global economic and cultural powerhouse. Meanwhile, in the United States, China's economic and cultural power has come under mounting fire.  

Short-happy hedge funder Jim Chanos, who prophesied the fall of Enron, argued in April that the country's heated property market was on a "treadmill to hell." Foreign Policy followed suit by more or less blaming China's alleged currency manipulation, rather than America's own corporate and economic malfeasance, for exporting unemployment to the United States. Even our President Barack Obama jumped on the dogpile, expressing concern that China has not moved its currency to a "more market-oriented exchange rate," during an April meeting with Chinese President Hu Jintao in Washington. His administration stopped short, however, of releasing an April 15 report to Congress expressing this disapproval in concrete terms, choosing instead to trot out the disgraced deregulationist Larry Summers to soothe the Chinese that such matters will be taken up at future gatherings.  

For its part, China has responded to the finger-pointing by the United States with its own middle digit.  

"We oppose the practice of finger-pointing among countries or strong-arm measures to force other countries to appreciate currencies," Chinese Premier Wen Jiabao said in March, before restating his well-publicized 2009 worries that U.S. Treasuries are in trouble. "In the press conference last year, I said I was a bit concerned about it. This year, I make the same remark. I am still concerned. I hope the U.S. will take concrete measures to assure its investors." 

Good luck with that, China. From resilient wage and unemployment stagnation to revelations of investment banks like Goldman Sachs selling "shitty" bundles of toxic mortgages to national and international suckers with one hand while clandestinely shorting them with the other, the United States is in no position to assure investors of anything. Which is why they've taken lately to crowing about China, rather than settling their own business at home. That business includes, of course, selling billions of American dollars and Treasuries to our Chinese sugar daddy to keep our faltering consumer economy alive.  

"China holds about $820 billion U.S. dollars, and about $480 billion is in U.S. Treasuries," Stefan Halper, senior fellow at the Cambridge Centre of International Studies and author of the new book The Beijing Consensus, told AlterNet by phone. "China would not take steps to decrease the value of the dollar, because that would decrease the value of its own holdings. China doesn't want to bring the dollar down or the U.S. economy down, but it is benefiting from American consumers, who buy its exports. which represents about 60 percent of its economy per year."  

Halper is firmly in the camp of those who are tagging China as a currency manipulator. In The Beijing Consensus, he argues that the rising 21st century superpower is suppressing the yuan, exporting unemployment and even standing in the way of America's lagging recovery from the global recession. In the process, Halper writes, China is also exporting its overall philosophy of economics and governance at the expense, pardon the pun, of our own. 

"Beyond everything else that China sells to the world, it functions as the world's largest billboard for the new alternative of 'going capitalist and staying autocratic,'" Halper explains in The Beijing Consensus. "Beijing has provided the world's most compelling, high-speed demonstration of how to liberalize economically without surrendering to liberal politics."  

Of course, he admitted, China couldn't have done it alone. America was more than happy, drunk on deregulation and war, to dig its own grave. 

"The disastrous involvement in Iraq and Afghanistan have just depreciated the American story and the American example," Halper told AlterNet. "You can look at the Pew data: There has been rising disapproval of the U.S. since Bush put us into those two wars. Plus, the Washington Consensus proved not to be a good form of Third World development, which opened the door to Chinese offers of low-interest loans and non-interference. So yeah, we've done things poorly. We've had a recession, and an inability to regulate our markets. We're certainly not perfect." 

That's probably the understatement of the new millennium. Viewed through that prism, the argument that our preeminent funder is somehow partially responsible for our own extensive economic troubles is disingenuous, even if esteemed economists like Paul Krugman have been sipping the blame-China Kool-Aid. What's gets lost in the financial wonkery -- or wankery, if you will -- is the fact that, through our own corruption and greed, we have willingly pushed nations into the arms of China rather than earn their trust. Through the misguided Washington Consensus, we and others tried and succeeded at establishing a rapacious list of interventionist measures -- concretized as "stabilize, privatize, and liberalize" by Harvard professor of international political economy Dani Rodrik -- since the 1990s that has ultimately culminated in our current lunacy. To argue at this late stage of the game that China is partially to blame for this is playing the kind of crappy defense that loses championships in pro sports. It shows, above all, that we have no game. 

"China will make decisions in its own interests, just as the U.S. does," Rachel Ziemba, senior analyst for China and oil-exploring countries at Roubini Global Economics, told AlterNet. "It's actually in China's interest in the mid-term to have a more flexible exchange rate as it increases their monetary policy autonomy and could boost domestic purchasing power, helping domestic consumption. It also could help control domestic inflation. But domestic dictates, not U.S. pressure, will determine Chinese policy moves in this area. Chinese authorities are balancing different economic pressures, and an appreciation of the currency would increase the price of Chinese exports." 

Like Halper, Krugman and more, Ziemba thinks that China is indeed a currency manipulator. "The pace of foreign-exchange reserve accumulation implies that the Chinese central bank is intervening heavily in the foreign-exchange market, implying that, yes, it is manipulating its currency." 

In that, it's not very different than anyone else playing the currency game, including the United States. Except that it's deftly playing the pegging game -- to the dollar, then to a managed float in 2005, then back again to the dollar during the crisis -- for the benefit of its nation, rather than a select few banks, funds and other entities. It's in it to win it. For everyone, depending on who you ask. 

"The bulk of China's foreign exchange reserves are recycled into dollar-based assets, which helps fund the massive U.S. savings shortfall," Morgan Stanley Asia's Stephen Roach wrote in a Council on Foreign Relations roundup called "Is China a Currency Manipulator?" "Who might deficit-prone Washington turn to if it shuts off the Chinese funding spigot? At a minimum, reduced buying by America's largest foreign lender would spell sharp downward pressures on the dollar and/or higher long-term U.S. interest rates -- developments that could well trigger the dreaded double dip in the U.S. economy." 

In other words, China is keeping its eye on the prize -- its own economic and political survival -- while the rest of the world, from the United States to the European Union treads water. And why not? A modest accounting argues that China's economy expanded at over 10 percent in the first quarter of 2010. Meanwhile, U.S. real gross domestic product probably grew around 3 percent in the same period.  

"We believe consumer spending is being buoyed by a variety factors that will not be maintained over the long term," Ethan Harris, chief North American economist for Merrill Lynch, told MarketWatch in late April. "Even with the recovery in net worth, households have essentially lost 15 years of saving." 

"Many countries have imbalanced economic systems," Ziemba told AlterNet. "China's economy has low external debt, which is a big plus, but the contingent liabilities of the government have increased as bank loans have increased. Yet with deposits having climbed as much as loans, China's banking system is well capitalized."  

In the final analysis, complaints about China's financial practices should be properly contextualized, especially when those lodging the complaints have done more to disrupt global financial practices than anyone else. Perhaps when those complainers have settled their own accounts -- with vampire squids like Goldman Sachs and JP Morgan Chase, or the print-happy Federal Reserve Bank, or the Supreme Court that recently ruled that corporations possess the same rights as people -- then their whining about China's currency manipulation should be taken a bit more seriously. But not sooner.  

"To the question of American excess and inability to regulate our financial markets, you're right," agreed Halper. "We have fallen down on that, and the Chinese have taken the opportunity to extol their model. But you've got compare China over time. What you see is two things: A rising middle class with a strong commercial material culture, and a highly repressive iron hand on the part of the central government. And that really is the most fascinating thing we see today. It's not classical communism. It's in business to perpetuate its own power, and we have to come to grips with it." 

Sure, no problem. But only after we come to grips with the business of perpetuating our own power first. Change begins, after all, at home.


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