“Hail Ants” View of China Is Politics, Not Economics
So goes the meme: America can’t press human rights in its diplomacy with China, or insist that China stop enabling and start pressuring Kim Jong Il, because China now owns a controlling interest in America. It’s not difficult to find examples of this view, though it turns out to a more prevalent theory among editorialists than economists. Our old friends at Al Gore’s Current TV sum up the argument this way:
President Barack Obama will work hard to build trust with China during his trip there, but how far will he be able to go in seeking changes on the key issues — currency, the trade surplus, North Korea, Iran, human rights and others — when he’s sitting down with his nation’s largest creditor? China holds $800 billion in U.S. debt and gets $50 billion a year in interest.
Next, we hear from Glenn Kessler, a fawning of the Chris Hill approach to North Korea and probably the worst correspondent covering the North Korea story for a major newspaper in the last decade. Here, he co-writes with Ariana Eunjung Cha about the Clinton Obama Administration’s soft line on human rights with China:
China is the biggest foreign holder of U.S. debt, which helped finance the spending binge the United States went on before the economic crisis. Some experts have expressed concern that China’s substantial holdings of U.S. debt give it increased leverage in dealings with Washington because any halt in Chinese purchases of U.S. bonds would make it more difficult to finance the government bailout and stimulus packages.
Not even Kessler can be faulted too much for failing to mention other perfectly sensible reasons why Clinton tends to go soft on China until forced to do otherwise. If you’re of a conspiratorial mind, you can always consider the case of naturalized U.S. citizen Norman Hsu and others whose bundled campaign donations to Mrs. Clinton’s past campaigns greatly exceeded their accountable earnings. The same suspicions of undue Chinese influence stalked President Clinton and Al Gore before her. A simpler explanation may be that Clinton is bound up with the foreign policy establishment, an establishment that’s increasingly subject to Chinese influence, and which includes people like Chris Hill and Chas Freeman, people who are trusted by this administration, and who are also predisposed to defer to Chinese interests.
None of this, of course, should deny that our borrowing is excessive and dangerous. So far, there’s little evidence that it has created many jobs, either. But between the lines, something else has to have these non-economists (not to mention every Chi-Bot on Sina.com) so suddenly interested in economics. I sense a certain welcoming of America’s loss of influence to do things the editorialists didn’t want us to do anyway — such as putting human rights on our diplomatic agenda, or putting serious economic pressure on North Korea. Others can scarcely contain their glee that the American hyperpower is dethroned, even if a newly ascendant fascism is the consequence, with all computers henceforth arriving with Green Dam pre-installed. Something about the tone of this seemed awfully familiar to me somehow:
Not being ready to welcome our new insect overlords, but not being an economist myself, I’ve hesitated to enter this debate until now. Yet all along, I still wondered: where else was China supposed to invest all its earnings from its exports to America? Why would China attack the value of the dollar when that would make Chinese products more expensive for American consumers? And what of China’s demographic bomb — the legacy of the one-child policy — which requires China to sustain high annual growth rates to pay for all those pensions? Could China do it without a strong American export market? (Here’s video, by the way, of Nicholas Eberstadt talking about this topic.)
In that light, how much sense would it make for China to make war against its most important market? Would it make sense for China to start selling its U.S. debt, thereby depressing the worth of its remaining investment? After all, if the U.S. economy underperforms, the voters punish the ruling party, but no one goes to the firing squad. Who can say the same if a recession strikes China? China needs its dollar reserves because the lives of its ruling class may depend on it one day.
Which is why I appreciate that the Heritage Foundation’s Derek Scissors, an expert on the Chinese economy, has finally answered those questions:
[T]he conventional wisdom–that America needs Chinese financing to continue its wild spending–turns out to be wrong. Partly because of the damaging jump in the size of the deficit, Chinese bond purchases have become irrelevant.
Official Chinese purchases of U.S. Treasury bonds are on pace to fall well below $100 billion for 2009 (the full-year total is published in February), while the federal government deficit soared to $1.4 trillion. Yet U.S. commercial interest rates are lower than at the end of 2008, when official Chinese purchases were equivalent in size to nearly half the federal deficit.[7] Official Chinese holdings of treasuries equal less than 7 percent of U.S. government debt.[8] Chinese bond purchases no longer seem to matter, if they ever did.
In addition, when Chinese purchases were large, it was because Beijing had no choice but to buy American bonds. The PRC can take in a great deal of money from the world through its trade surplus and other activities. The same rules that keep the Chinese currency undervalued keep Beijing from spending the world’s money at home. Most foreign money disbursed in China ends up right back with the central government, by law.[9]
That can leave the PRC sitting on a huge pile of dollars and the U.S. economy as the only place big and solid enough to absorb it back. China has not been lending; they have been investing the only way they can.
Finally, the bulk of China’s pile of foreign money can be traced back to the Sino-American trade gap. On exactly the same lines, the PRC ties its currency to the dollar. Linking itself closely to the American economy that way is also the PRC’s best choice. In contrast, any American financial dependence on China has almost vanished.
Scissors’s piece is worth reading in its entirety. Not that this is exclusively the view of conservative economists. Indeed, economist Sebastian Mallaby of the Council on Foreign Relations, who writes for the Washington Post and The Economist, sees China as the vulnerable party in this relationship:
By running colossal trade surpluses, they have accumulated vast holdings of bonds and shares denominated in dollars, the currency at the core of global finance. If the greenback declines, China’s government stands to lose a fortune.
The political backlash from such a loss could be brutal. Already, Chinese bloggers have ripped into the officials who invested $3 billion in the U.S. private equity group Blackstone, only to see the stock plummet. “They are worse than wartime traitors,” one online chatter fumed, according to the Financial Times. A large fall in the dollar would make the Blackstone loss look like a picnic.
So Chinese authorities are searching for a way to reduce their exposure to the greenback. The surest method would be to stop buying so many U.S. Treasury bonds, but that would mean allowing the Chinese currency to rise against the dollar, which would hurt Chinese exporters when they are already suffering. So the government is scrabbling around for something — anything — that can spring it from the dollar trap without driving up its currency.
It’s a wee bit early to hail our new insect overlords. We may proceed with the assumption that we are still an international power. Yes, China influence will continue to rise, but only until it hits the political and demographic barriers it has placed in its own way. Its arrogance is still a function of its insecurity and driven by its interest in appealing to domestic nationalism.
In the end, I’m left with the sense that the “Hail Ants” view is driven by emotion. I’m old enough to remember the warmed-over yellow peril of the 1980’s, when it was Japan’s overregulated state capitalism that kept Americans awake. Overregulated economies like China’s tend to have fewer recessions, but when they fall, they fall hard. When that happens, it’s plausible that China will sell U.S. debt in a hurry and depress the value of the dollar. That will be dangerous in some ways, and good for our exports, but it still won’t mean that China owns America.