This is a thread about the complex interrelationship that has developed between the U.S. and China, as the economies of an established and a rising superpower have become increasingly intertwined. This is the topic of the first of Ted Koppel's four documentaries on China, which are coming in July.

Here is a 2007 article that appears on the web site of the Russian newspaper Pravda:


China makes US economy its hostage

24.10.2007 Source: URL: http://english.pravda.ru/business/finance/99414-china_us_economy-0

Over the last 30 years, China’s economy has grown at an average annualized rate of nearly 10%. While this statistic alone is jaw-dropping, what is more impressive is the extent to which the nominally Communist country’s economy has become intertwined in the global economy. China now exerts enormous influence over the economies of virtually every country in the world, and a slight change in its domestic economic policy has the potential to send shockwaves rippling throughout the world. Nowhere is this more apparent-and frightening-then in China’s economic relationship with the United States, which is very much at the mercy of China when it comes to prices, wages, interest rates, most importantly, the value of the Dollar.

Read also business/finance/10-09-2007/96909-us_economy-0">“China may lead US economy to collapse dumping US dollar”

Forex Reserve Diversification

Let’s begin with an examination of China’s forex reserves, which is probably China’s biggest bargaining chip in its economic relationship with the US. Up until two years ago, China’s currency, the RMB or Yuan, was pegged to the Dollar. As with any peg, there often develops a discrepancy between the fixed value of the currency and the value that the market would assign if the currency were permitted to float. As China’s economy surged ahead, especially over the last five to ten years, tremendous pressure began to build under the RMB. In order to maintain the peg and hold down the value of the RMB, China began accumulating foreign exchange reserves by withdrawing foreign currency from circulation. Today, China’s foreign exchange reserves are massive, at $1.4 trillion as of September 2007.

In the eyes of American policy-makers, this presents a problem because the majority of these reserves are held in Dollar-denominated assets, namely in the form of US Treasury securities. The US government theoretically could not be happier that foreign Central Banks are willing to finance its perennial budget deficits. However, this borrowing has reached a point where foreigners now control over 40% of the US national debt. Moreover, long-term US interest rates are market-driven, based on the buying and selling of US government bonds. In other words, the US has gradually ceded control of its long-term interest rates to foreign Central Banks, namely China and Japan.

As the Dollar has depreciated over the last five years, many Central Banks have begun “diversifying” their forex reserves, by switching from Dollar assets to assets denominated in other currencies. This is problematic for the Dollar for two reasons. First, switching from US assets to European assets, for example, directly causes the Dollar to depreciate. Second, the bulk sale of US treasury securities (whether or not they are replaced with other US-assets) causes US bond prices to decline and hence, yields to increase. Thus, if China suddenly decided to diversify its reserves, for economic and/or political reasons, it could potentially crash the Dollar and send US long-term interest rates skyward.

Currency Manipulation

The second aspect of the China-US economic relationship which China could wield to its advantage is the RMB itself. American public officials enjoy criticizing China for failing to allow its currency to appreciate more quickly. In fact, there is a bill that has been lying dormant in the US Congress which threatens to slap a massive across-the-board tariff on all Chinese imports if China fails to allow the RMB to appreciate adequately against the Dollar. What policymakers don’t realize is that a rapid appreciation in the RMB would actually harm the US economy.

Coupled with its growing role as the world’s factory, China’s cheap currency has made Americans wealthier, by increasing their purchasing power. As production of labor-intensive goods was outsourced to China over the last decade, prices for finished products began to fall both in real terms and in nominal terms. While the effect on US employment trends is debatable, its effect on prices has been unambiguous. Thus, even while the American economy boomed, inflation remained relatively modest by historical standards. This allowed the Federal Reserve Board to hold interest rates down and foment economic growth.

Direct Competition with US Exporters

A more potent (and plausible) weapon would be to compete more directly with US exporters, by expanding into high-technology products. Currently, China specializes in manufacturing labor-intensive products, which have long since been manufactured outside of the United States. As previously stated, a revaluation of the Chinese Yuan would surely not return production to the US. However, if China were to expand into capital-intensive and/or high-technology products, it could easily steal marketshare and jobs from the US.

Raw Material Pricing

In addition, there is the impact that China’s economic growth has exerted on global raw material prices. It has been said that 25% of the world’s construction cranes are currently located in China, to support the country’s building boom. These massive development and infrastructure projects require proportionally massive quantities of raw materials, namely cement and steel. Unfortunately, China is especially inefficient at converting raw materials into finished products. Combined with the CCP’s emphasis on the near-term (which inherently prioritizes low cost over efficiency), this is placing a tremendous strain on global energy supplies, driving prices skyward.

Competition for Energy

The global prices for oil and coal are already at record highs and China only consumes 1/15 the amount of per-capita energy as the US! Chinese energy companies are becoming increasingly visible, scouring the globe for stable supplies of energy and often coming head-to-head with American energy companies. Conveniently, China does not recognize the ethical issues which arise from purchasing energy from dictatorships and corrupt regimes, whereas US companies are limited from doing business in these places. From Sudan to Myanmar to Kazakhstan, Chinese companies have set up join ventures where US companies could not. While energy prices have certainly risen in the US, they have not kept pace with global energy prices. In this way, China is able to ensure that its citizens and its businesses have the oil, coal, and natural gas that they require, while their American counterparts may be forced to conserve.

Two years ago, the Chinese National Offshore Oil Company [CNOOC] attempted to purchase an American energy company, Unocal, for over $18 Billion. However, the deal was blocked by the US Congress, which feared Unocal’s energy reserves would be supplied to China at the expense of Americans. It did not help CNOOC’s case that 70% of the Company was effectively owned by the CCP. Needless to say, Chinese government officials were not happy with the outcome; (Unocal was ultimately sold to Chevron for a lower price). China has already shown its willingness to use extreme tactics to secure an adequate energy supply. It seems reasonable to expect its energy policy will continue to oppose and inconvenience the US.

This is from the World Bank's

East Asia & Pacific on the Rise blog:


Is China de-linking from the U.S. economy?
Submitted by David Dollar on Wed, 02/20/2008 - 12:17.
The year 2007 was an important milestone in modern economic history. While the U.S. grew well, China contributed more to global GDP growth than the U.S. did. That pattern is likely to continue for the foreseeable future. Roughly speaking, the U.S. economy is about four times the size of China’s. If the U.S. grows at 2% -- which is solid for an advanced economy – and China continues to grow at 10+%, then China will be adding more to global GDP each year than any other country. The same can be said for global trade: China’s imports have risen 28% in the past year, so that it is an increasingly important source of demand for other countries.

The growing importance of China in the global economy is the main reason that we have launched this China Development Blog. There is huge interest in the prospects for China and in what is actually happening on the ground here.

While China has emerged as an economy of nearly equal importance to that of the U.S., it is also important to note that China and the U.S. are closely intertwined. There is broad agreement that the U.S. economy is slowing down in the wake of the sub-prime financial mess. Views on whether the U.S. goes into recession are about 50:50; but what is clear is that there will be a significant slowdown in U.S. growth. How much effect will this have on the global economy? How much on China? One school of thought has it that China and the rest of East Asia are increasingly “de-linked” from the U.S. cycle, hence they will feel little impact.

This de-linking hypothesis is implicitly taken up in our new macro quarterly update. We come out somewhere in the middle, though leaning somewhat to “de-linking.” Last fall we projected 10.4% growth in 2008 for China; now, in the face of weaker prospects for global growth, we mark that down to 9.6%. Thus, we reject the complete de-linking view. The slowdown in the U.S. and the broader global economy will have some effect on China. This was already evident in the fourth quarter of 2007, when net exports essentially contributed little to China’s growth. China’s export growth has been slowing down, its import growth has been picking up, and this will have some effect on China’s growth.

But our 9.6% forecast is also something of a nod to de-linking. If actually achieved, that would be an excellent rate of growth in a slowing world economy. Even in China, growth rates consistently and considerably above 11% are not sustainable and risk inflation. Hence, a modest slowdown may be a good thing for China.

From the point of view of arithmetic China can easily meet our 9.6% projection. In these recent heady years of growth, net exports have contributed 2 to 3 percentage points to growth. China’s domestic demand has contributed about 9 percentage points. So, without the stimulus of net exports, China can grow at 9+%. The problem is not arithmetic, however, but human behavior. The slowdown in China’s exports causes real pain. More than 1,000 shoe factories closed in Guangdong province last year, and in China all of these factories are pretty large. As China’s adjusts to a different global environment, some entrepreneurs will lose their shirts, large numbers of workers will lose their jobs. The risk for China is that other firms and households will respond by being more cautious and cutting back on spending and investment, just as that domestic demand is needed more than ever.

One reason that we remain cautiously optimistic is that many of the drivers of the domestic economy—confidence, profitability, liquidity, and consumption—are strong as China enters 2008. Moreover, the government has lots of fiscal space to stimulate the economy. Recent fiscal policy has been very conservative. In fact, it is ironic that the government has been constrained in dealing with real social issues – such as poor rural health care or lagging rural schools – because overall the economy was in danger of overheating in recent years. Hence, if there is an unexpectedly sharp falloff in domestic demand as the global economy slows, the government could easily increase its spending on social services and infrastructure – meeting real needs and keeping the macro economy on track.

Bottom line: China needs to be agile with its macro policy as the uncertainties of 2008 unfold, but with good management it can continue to grow at 9% and above.

This is from the U.S. State Department's country profile of China:

The U.S. trade deficit with China reached $256.3 billion in 2007, as imports grew 12%. China's share of total U.S. imports has grown from 7% to 16% since 1997. At the same time, the share of many other Asian countries' imports to the United States and the U.S. trade deficit with the Asia-Pacific region as a whole have fallen.

U.S. goods exports to China in 2007 accounted for 5.7% of total U.S. goods exports, up from 1.9% in 1997. The top five U.S. exports to China in 2007 were electrical machinery and equipment (up 4.8% over 2006 levels), power generation equipment (up 15%), air and spacecraft (up 18.2%), oil seeds and oleaginous fruits (up 61.7%), and plastics and plastic articles (up 32.6%).
China is now one of the most important markets for U.S. exports: in 2007, U.S. exports to China totaled $65.2 billion, more than triple the $19 billion when China joined the WTO in 2001. U.S. agricultural exports have increased dramatically, making China our fourth-largest agricultural export market (after Canada, Japan, and Mexico). Over the same period (2001-2007), U.S. imports from China rose from $102 billion to $321.5 billion.

Here's another odd fact: foreign-backed ventures produce about half of China's exports. U.S. companies in particular have invested about $54 million in China, according to Economywatch.That's nearly three-quarters of the total direct foreign investment in China.

Xinhua reports that the yuan has risen to a new high against the U.S. dollar. The yuan has risen five percent since the beginning of the year, a trend that is going to make the U.S.-China trade imbalance even more painful for the U.S.

Hello Pat..Well I kinda predicted last year what was going to happen to the economy as a result of bad leadeship. Tricle down economy..what a joke. A vibrant economy starts at the bottom...good wages is the beginning. I believe that is wat is happening in China right now. Consumer spending domestically and in the surrounding asian states that trade with China is providing capital to fuel the retail businesses and thus spurring tremendous increases in manufacturing creating more jobs and so forth. not only for China but for the whole Asian region. The question I have today is...how does China fuel it's vast appitite for energy..they are oil and gas poor..but have large deposits of coal. How do Chinese cope with fuel prices? How is public transportation solving their over use of energy. What is their Nuclear, wind. sola, hydroelectric, geo thermal, etc. percentage of total energy production? Why are they able to grow at a quicker pace than the U.S with 10 times the population and the same energy limitations as we have. As a former neo communist state with strict ties to Markism.. they have been able to convert to a quaisi capitalist state with a socialist idealogy as their formal idealogy. I believe that we as Americans are heading that way also..or we may have to to survive as a competitive nation. The capitalist in this nation have all but ruined our true democracy.. and cetrtainly have damaged pure capitalism through greed, corruption, and incompetence. Perhaps China is the model for the Next SUPER POWER. We are certainly living in the midst of an Epic historical era. I feel that because of the collapse of the world economy in the near future.. we will either come together as nations of a common world and find amazing new technologies to solve our energy needs..or we will destroy ourselves in yet another world war. At this point in time..we need more Engineers and scientist..and less CEO'S, bean counters, and especially less politicians. Ah what this nation could be if we had another FDR type of leadership. A leader with compassion, intelligence, and the will to do what is right for the American people...all of them..not just the rich and powerfull. I applaud China for resurrecting itself from a flawed Idealology and creating their own new hybrid form of socialism..Perhaps it is the model for the future. We should pay attention to their progress and especiall see how they adapt to correcting their failures..very interesting.

hey Koonism, nice to see you on the board again, and thanks for an austute comment as usual!

The International Herald Tribune reports:

China will lead a delegation of companies to the U.S. to look for investment opportunities as the next round of an economic dialogue begins, Chinese officials said Friday.

A new set of Chinese trade negotiators will take over dialogue with the U.S. at the fourth round of the Sino-U.S. Strategic Economic Dialogue, being held June 17-18 at the U.S. Naval Academy in Annapolis, Maryland. The Chinese team will be led by Vice Premier Wang Qishan, who took over in March from the well-respected and long-serving Wu Yi.

U.S. Treasury Secretary Henry Paulson is returning as head of the U.S. delegation. Paulson launched the process in 2006 to address trade tensions and deflect pressure from U.S. critics for punitive action over Beijing's huge trade surplus and currency controls.

The delegation of Chinese companies will tour the U.S. in conjunction with the dialogue to look for trade and investment opportunities, said He Ning, director general for U.S. and Oceania affairs at the Ministry of Commerce.

"We hope this delegation can bring back some orders," He said at a briefing for reporters. He didn't identify any of the companies or their industries.

Chinese companies have invested only US$550 million in the United States, while U.S. companies have sunk a total of US$22 billion into China, according to the U.S. Commerce Department.

However, He said investments from China were slowed by Washington's "cautious" attitude on mergers and acquisitions by Chinese firms.

Bilateral trade was also hindered by U.S. government restrictions on the export of high-tech items to China, he said. The U.S. restricts the export of high-tech items that could have both a civilian and military use.

Still, China overtook Japan last year to become the third largest export market for the U.S., he said.

"This change shows amply the efforts the Chinese side has made to ease the trade surplus with the U.S.," He said.

Congressional unhappiness with China's trade practices has grown as the U.S. trade deficit with the country has soared. Last year, the deficit climbed to US$256.3 billion, the highest imbalance ever recorded with a single country. Many in the U.S. argue China keeps its currency, the yuan, artificially weak in order to promote cheap exports.

Assistant Finance Minister Zhu Guangyao said relaxing controls over the value of the yuan was in China's own interest, but that China would allow the yuan to rise in a gradual and highly controlled manner.

"In order to sustain China's economy, we inevitably need to accelerate the reform of RMB's exchange rate regime," he said, referring to currency by the initials of its other name, the renminbi, or "people's money."

The Chinese government contends it is moving as quickly as it can to revalue the yuan, which has risen by a little over 19 percent against the dollar since the Chinese revamped their currency system in July 2005.

A 10-year cooperation agreement on energy and the environment will also be signed at the meeting, Chinese officials said. The agreement would encourage technological innovation to address climate change and industrial pollution.


What strikes me is how much more that U.S. companies have invested in China than vice-versa.

Xinhua puts a positive spin on U.S. Treasury Secretary Henry Paulson's remarks about the U.S.-Chinese economic relationship:

The U.S.-China economic relationship is growing in a positive direction through the on-going, dynamic and respectful discussions of the Strategic Economic Dialogue (SED), U.S. Treasury Secretary Henry Paulson said Tuesday.

Delivering a speech outlining the goals of the high-level economic talks the two countries will hold next week, Paulson described the bilateral economic relationship as "complex, broad and important to both our countries and to the world economy."

The SED has brought progress faster and more broadly on issues important to the U.S. and global economy than would have been possible otherwise, Paulson said, noting it is important to resist calls for erecting protectionist barriers.

"It is clear that our strategy for robust engagement with China- intensive dialogue but with resort to WTO dispute settlement and WTO-sanctioned trade remedies if needed - is more productive than protectionist policies or legislation," he said here in his prepared remarks.

On June 17-18, high-level delegations from China and the United States will meet in Annapolis, Maryland, north of Washington, for the fourth round of SED launched in December 2006.

The upcoming discussions will focus on five areas, Paulson said.

These are: managing financial and macroeconomic cycles; developing human capital; the benefits of trade and open markets; enhancing investment; and advancing joint opportunities for cooperation in energy and the environment.

Paulson expressed his confidence that next week's meeting "will move the United States and China even further forward to a stronger economic future."

"We are building upon a shared vision that is possible because of our cooperation, and feasible because of our commitment to the prosperity of our people," the secretary said.

The SED is being held twice a year, alternating between the two countries. The last meeting was held in December in Beijing, China.

The Times of Indiahas this intriguing story:

ANNAPOLIS: In a new twist, Chinese officials who have been getting an earful from Americans on how to run their economy are now openly rebuking the United States for the world's economic ills -- and even dispensing some advice.

From the plummeting US dollar to the American housing market crisis, which have wreaked havoc across the globe, Beijing has been hinting mismanagement on the part of Washington and cautioning about the dangers of keeping markets too open.

The self-confidence of the Chinese, riding on the crest of rapid economic growth on the back of 1.7 trillion dollars in foreign reserves, was highly evident at the bilateral cabinet-level talks that began in Annapolis, Maryland, east of Washington on Tuesday.

If at previous meetings of the twice-yearly Strategic Economic Dialogue the Americans have been telling the Chinese how to reform their country using the US economy as an example, it may be the opposite this time.

"In the past, in the dialogue or discussions between China, the biggest developing country, and the United States, the most advanced economy in the world, China always hoped to draw experience from the US to guide its own development," said Chinese central bank governor Zhou Xiao Chuan.

"However, this time during our discussions, we see something different," he told reporters during a break in the talks at the sprawling US Naval Academy.

The chief of the People's Bank of China pointed out that reforms and market openings could backfire and that it could also be a lesson.

"China is of course interested in learning from the experience of the United States in macroeconomic regulation and using a market economy, and now we also want to see what lessons we can draw from the experience of the US after the turbulence," he said.
Zhou reserved harsher criticism for the weakening US dollar, blaming it for driving up the price of oil and other commodities, stoking inflation and dampening the growth of developing countries reeling from exchange rate turmoil.

Last week, Sun Zhenyu, the Chinese ambassador to the World Trade Organization, asked Washington to take action to stabilize the dollar and raised concerns over a "rising sentiment of protectionism" in the United States, saying that it could threaten global trade.

"As a major currency for international reserve, the dramatic depreciation of the dollar has lead to shrinking national reserve of many countries and reduced social welfare," Sun said.

The US currency has slid more than 30 percent since 2002. With the yuan having appreciated more than 20 percent against the dollar over the last three years, US Treasury Secretary Henry Paulson this time dropped his familiar theme of pressing for the Chinese currency's appreciation in his opening remarks.

Some US officials have blamed the yuan as being kept artificially low, saying it was a key factor in the US trade deficit with China, which hit a record 256.2 billion dollars last year.

As Beijing paraded Zhou and Chinese Finance Minister Xie Xuren before the foreign media for briefings on the session on "Managing financial and macroeconomic cycles," Washington settled for US special envoy for China Alan Holmer to talk to the reporters.
US Federal Reserve chief Ben Bernanke and Treasury chief Henry Paulson, who led the US side at the session, did not meet the media on Tuesday.

Some US officials think China could be highlighting the US housing crisis that has sparked a global credit crunch to delay any major financial market reforms at home.

"There are lessons to be learned from the economic problems in the US and ... there will be significant costs to China if they were to slow down with respect to their (liberalization of the) financial sector -- the central nervous system of any country," Holmes warned.

Xinhua reports that the PRC government is pressing the U.S. to do something about its economic problems, before the slowdown starts to effect China.

BEIJING, June 30 (Xinhua) -- Chinese Premier Wen Jiabao, in talks with U.S. Secretary of State Condoleezza Rice on Monday, called on the United States to take measures to stabilize its currency and prevent further slowdown of the global economy.

Wen highlighted unstable factors in the world economy, stressing they were challenges for both developing and the developed countries.

China was taking measures to safeguard its stable economic development and hoped the United States would overcome its credit crisis soon, Wen said, adding that China was willing to cooperate with the United States.

"We are willing to make joint efforts with the U.S. to cohere to the dialogue and consultation mechanism and take each other's concerns into consideration to better achieve mutual benefits," Wen said.

He applauded the growth of the bilateral relations and cooperation in fields such as trade, the fight against terrorism, energy and environment.

"The consolidation of China-U.S. constructive and cooperative relations is our shared responsibility," Wen told Rice.

Wen also expressed gratitude for the assistance offered by the U.S. government and people for China's earthquake reconstruction.

After her arrival in China on Sunday, Rice visited Chengdu, capital of Sichuan Province, to see for herself the effects of the 8.0-magnitude earthquake on May 12.

Rice said she was very impressed by China's quake relief and reconstruction work and the United States would continue its support and help for those affected.

Rice said bilateral relations had developed significantly in the last seven years, citing the fact that the two countries had established close high-level exchanges and communication, a strategic economic dialogue and strategic dialogue, and good cooperation on the Korea and Iran nuclear issues.

The U.S.-China relationship was of vital importance to the world and the Bush administration would continue to promote ties and help the next administration to fully understand its importance, Rice said.

She also proposed the two countries work closer on the issues of energy and climate change, address the difficulties and challenges posed by the slowdown of the world economy, and jointly promote free trade.

Also on Monday, State Councilor Dai Bingguo met with Rice.

This article reminds me of when President Bush remarked that he could peer into Russian leader Vladimir Putin's soul.

Bush on China's Hu: 'I enjoy the man'
2 hours ago

HONG KONG (AFP) — US President George W. Bush said he enjoyed good one-to-one ties with Chinese President Hu Jintao, whom he described as straightfoward and open, the South China Morning Post reported Friday.

"I enjoy the man," Bush said in an interview with the Post and other Asian press at the White House before his trip to the Beijing Olympics next week.

"I find him to be a straightforward guy. I'm very comfortable in his presence, and we will talk about the kind of issues we always talk about."

Bush said he found Hu "very open" about both his own concerns and the internal pressures he faced, and that they could have relaxed conversations about their families.

"It's important to be able to have those kind of relations, because he's got to tell me what's on his mind in order to be able to deal with problems," the US leader said.

"And I think when people study my presidency and find out how Bush conducted foreign policy, they'll see I don't shy away from things. I am not a shy person."

Bush, who will hold talks with Hu during the Olympics, stressed he would not "politicise" the visit.

But the Post report came a day after Beijing said Bush had sent a "seriously wrong message" by meeting with leading exiled Chinese dissidents.