China as the World's Creditor and the United States as the World's Debtor

By Sharma, Shanlendra D. | China Perspectives, October 1, 2010 | Go to article overview

China as the World's Creditor and the United States as the World's Debtor


Sharma, Shanlendra D., China Perspectives


On 3 April 2010, the Obama administration announced that it would delay publication of the semiannual exchange rate report to Congress (due on 15 April) containing the international economic and exchange rate policies of America's major trading partners. The report was eagerly awaited because it would officially state the Obama administration's position on China's exchange rate policy, in particular whether Treasury Secretary Timothy Geithner would declare China a "currency manipulator." Instead, striking a measured tone, Geithner tactfully noted, "China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing." Geithner noted that "the best avenue for advancing U.S. interests at this time" is via discussions in multilateral and bilateral forums, including that of the G-20 finance ministers and central bank governors in late April; the semiannual Strategic and Economic Dialogue between the United States and China in May; and during the meeting of G-20 leaders and finance ministers in June.(l) To further assuage Beijing, Geithner 7 April made an impromptu 75minute stopover at the VIP terminal of Beijing airport (on his way to India) to meet with Vice Premier Wang Qishan (China's leading finance official) to "exchange views on U.S.-China economic relations and the global economy."(2)

The Treasury's conciliatory message was no doubt intended to deescalate tensions that had been brewing for months between Beijing and Washington. In fact, the latest round of the war of words began during Geithner's confirmation hearing (in January 2009) for Treasury Secretary when he bluntly stated that both he and "President Obama - backed by the conclusions of a broad range of economists - believe that China is manipulating its currency."(3) Geithner's tough rhetoric brou^it nods of approval from the members of the Senate Finance Committee - many of whom have long rallied against Beijing's alleged malpractice and were now hoping for a firm stance against China from the new Obama administration. However, to the markets, Geithner's clumsy and accusatory tone signalled a potential confrontation between the world's largest and third largest economies. The already jittery markets responded almost immediately as investors became concerned that China might scale back its purchase of US debt if the new administration pushed Beijing to further revalue its currency: the dollar promptly fell, the price of gold jumped by $40, and the price of Treasury debt was driven lower.(4) Although Geithner tried to gloss over his remarks by stating that what he actually meant was for China to adopt "market exchange rates," it brought only short respite to this sensitive subject.

Clearly slighted, the usually unflappable Chinese Premier Wen Jiabao fired back by blaming the US-led financial system for the world's economic crisis. Wen, the first Chinese premier to visit the annual global meeting of the world's powerful in Davos (Switzerland), delivered an uncharacteristically stinging indictment against the West, in particular, the United States; although he did not directly name the United States, the target of his remarks was unmistakable. Wen blamed an "excessive expansion of financial institutions in blind pursuit of profit," a failure of government supervision of the financial sector, and an "unsustainable model of development, characterized by prolonged low savings and high consumption" for the global financial crisis.(5) Again, on 14 March 2009, speaking at a news conference at the end of the Chinese parliament's annual session, Wen said he was "worried" about the safety of China's over $1 trillion investments in American government debt and that Beijing was watching economic developments in the United States closely. Wen expressed concern that the massive stimulus expenditures in the US could lead to soaring deficits - which in turn could sink the dollar's value and thereby China's massive investments. …

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