During last year’s G-20 summit in Pittsburgh, US President Barack Obama said that “global fiscal imbalances” had to be addressed for the world to get over its economic hangover. This wasn’t a Madison Avenue turn of phrase. But in its nerdiness was embedded a big geopolitical subtext. This manifest itself in the next few months as the US and China go for each other’s jugular. Godzilla versus Destoroyah. It doesn’t get bigger than this.
The origin of what one Washington lobbyist called “a tectonic shift regarding China in the US” is a consensus within the Obama administration that the source of the financial crisis, the reason the recovery has been jobless, and the primary reason why the crisis may happen again, is “fiscal imbalance”.
This school of thinking argues that during the Lehman Brothers Era the world was economically divided between those with China-like qualities and those with US-like ways and means. The China camp exported like crazy and used the resulting currency reserves to subsidise consumption in the American-style countries. The Americans lived off the cheap credit, imported like crazy but also used the money to blow up asset bubbles. Such imbalances are not unknown. In a market environment, however, the resulting imbalance corrects itself through exchange rates. But in one where the Chinese government pre-empts the market and deliberately keeps the yuan low, the result is crisis.
Washington pundits say the US has concluded that putting the Great Recession out of the way, once and for all, means putting the Great Currency Fix out of the way as well. The Democrats’ favourite Nobel economist Paul Krugman has calculated that Chinese ‘mercantilism’ will cost America 1.4 million jobs over the next few years.
China must export less if the US is to save more. That means the yuan must rise. This, not love, will make the world spin this year.
Obama held his fire earlier because he needed Chinese assistance on a host of other international issues. Beijing was less than helpful on Iran and North Korea. It humiliated Obama during his November visit to Beijing, though he angered many in the US by refusing to meet the Dalai Lama beforehand. Insiders say Obama described the atmosphere of his meeting with Hu Jintao as “frigid”.
The straw that broke Obama’s patience was Copenhagen. The US believes it had a pre-summit deal with China on climate change. But Beijing reneged and dumped the US. It then rubbed salt in the backstab. It sent low-level officials to meetings with Obama and prepared the ground for the US president to go back home empty-handed.
The Danish caper proved a step too far. The Democrats, remember, include human rights activists, green types, labour unions, Free Tibet people and a lot of people uncomfortable with the Chinese government. Their congressional supporters have been restrained from taking action against Beijing only because the Obama administration would whisper the words ‘climate change’ and ‘T-bills’ to them.
Copenhagen removed the first inhibition. House Speaker Nancy Pelosi is a known Sinophobe in the US system. But she kept quiet during her visit to China last year. “You know why? Because climate change was more important to her,” said a former member of the US climate change negotiating team. “Now she sees no reason to hold back.”
The second inhibitor, the T-bill issue, refers to the fact that China holds a quarter of the US public debt in the form of some $800 billion worth of US Treasury bills. The standard view is that China is now ‘the US’s banker’ and has the sole superpower by the short and curlies.
This was always exaggerated. The present view in Washington is that it doesn’t matter. If China dumps Treasury bills, it will stab itself because the value of its holdings will fall and US consumers will buy less Chinese stuff. More to the point is that the world is knee-deep in capital right now and there are enough alternative buyers of T-bills. Krugman is one of those who argue the T-bill threat is a bluff. “It would probably weaken the dollar against other currencies — but that would be good, not bad, for US competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank you note.”
The US is preparing to fire broadsides into the Chinese economy. The ebb of any political support to at least keep Beijing cooperative was evident when the US imposed tariffs on imported China tyres and steel. It was overt during the recent contretemps between Google and the Chinese authorities over internet censorship. The White House publicly supported the US search engine company. The lobbyist explained the significance: “Recall that along with labour unions, Hollywood, the Jewish community and trial lawyers, Silicon Valley — and Google specifically — is one of the financial pillars of the Democratic Party.” China is responding in kind. “Note that China is not sending anyone senior to the latest Permanent 5+1 meeting on Iran.”
A senior US multinational executive said that the Obama administration has warned US companies to “button down” their investments in China by April. “That’s when the fur is going to fly.”
When others close to the Obama administration were asked whether the US president would try to restrain the momentum against China. They said, “He believes Beijing has done nothing but kick him in the teeth since he became president.”