Some observers have focused on the U.S. and
the PRC as the world's largest and most extensive economic
relationship, a G-2.
The Sino-American economic relationship is exceptionally
important. There is scant evidence, however, to expect enough
cooperation from the G-2 to resolve the crisis. Rather, the two
countries seem to be moving further apart.
Distance in External Policies
There are few reasons for optimism about a Sino-American G-2.
Initial claims that China was immune to the crisis or, even further
off base, would lead the world forward have thankfully, if
belatedly, been discredited. There remain variations on the view that
Beijing can be helpful in a supporting role to the global economic
leader, the U.S. Such notions have always been implausible and now
are increasingly so.
At the G-20, Presidents Obama and Hu are scheduled to announce a
new mechanism for bilateral negotiations, replacing the Strategic
Economic Dialogue. Until and unless this mechanism yields
results, it will be another venue for empty talk. China's pledge to
assist the IMF in some notable fashion is a genuine cooperative
step. Washington's response will probably be
announced soon thereafter, as the Department of the Treasury is
unlikely to cite Beijing as manipulating the yuan.
This is a reasonable position, since China's currency policy is
the same as many other countries: a peg to the dollar. Even the
pretense that the peg was lifted back in 2005 has been abandoned in
the last few months, when the yuan has not budged against the
The problem is not broad currency "manipulation" or the dollar
peg itself. The problem is the peg in the context of the huge,
persistent bilateral trade imbalance. While posturing against
protectionism, Beijing refuses to let the price governing
trade with the U.S. adjust to restore equilibrium in that
trade--hardly the hallmark of a good partner. In fact, by using a
tighter peg to clutch more firmly to its bilateral trade surplus,
China is becoming an increasingly bad partner.
Examples of fresh Chinese behavior include Beijing's recent call
for the dollar to be replaced as the world's reserve currency. Many
countries can legitimately and loudly complain about the dollar and
American policies behind it; the PRC cannot. Its chosen balance of
payments system has played in important role in the recent
evolution of the dollar regime. Without taking long-overdue steps
to alter its own system, China is asking the entire world--but
especially the U.S.--to accept the adjustment costs necessary to
replace the dollar.
On the investment side, stability reigns, for better and worse.
The State Administration of Foreign Exchange continues to buy
American bonds. Foreign companies continue to be unable to
buy Chinese companies, as demonstrated with the rejection of Coke
two weeks ago.
But the Coke fiasco serves as an immediate reminder that
Washington, too, is playing a role in pushing the U.S. and PRC
farther apart. The odd, poorly justified Coke decision may be
traced in part to poorly justified American rejections of Chinese
investment, including but not limited to the well-known bar on
CNOOC buying Unocal. The U.S. has also violated World Trade
Organization norms by applying both countervailing and anti-dumping
duties to Chinese goods, when these were meant as alternatives.
Disconnect in Internal Policies
Those who see or advocate a closer Sino-American partnership
typically start by noting that growth in the world's two largest
(adjusted for purchasing power) economies benefits both nations,
not to mention the rest of the world. This claim has been and will
certainly be true again. But it is not presently true for Chinese
There is a general misconception that the PRC directly
contributes to global growth by virtue of its own GDP gains. One
simply divides the increment to the Chinese economy by the
increment to global economy to get China's contribution to the
world: This is incorrect. As an accounting matter, the PRC extracts
wealth from other nations via its trade surplus. The Chinese
surplus enters as a positive for Chinese GDP and a negative in GDP
for those countries running a deficit, especially the U.S. where
the imbalance is particularly large.
Until the recent financial shock, the greater competition
introduced by China's rise more than compensated for its trade
surplus, which is a small fraction of global GDP. Products made in
the PRC improved the availability and quality of consumer goods and
permitted sustained and powerful pro-growth policies without
accompanying inflation. With demand for the moment woefully
inadequate, though, the lower prices and higher quality introduced
by Chinese goods and services is temporarily redundant.
Far from helping, Beijing's stimulus plan exacerbates the
negative aspects of China's interaction with the global economy.
Local governments are supposed to provide the bulk of the stimulus
but local revenue is already inadequate. That means the chief tool
is bank lending, as seen in a loan surge since October.
Bank loans overwhelmingly go to firms, not
individuals. Beyond just offsetting short-term costs,
the loans finance investment in new production, causing investment
to surge slightly from an already blistering 26 percent pace at the
end of 2008, with a goal of further acceleration. With Chinese
saving rocketing higher at better than a 30 percent annual clip,
there is insufficient domestic consumer demand. More investment and
more supply thus inevitably translate to more pressure to
Due to the structure of the American economy, where growth is
associated with a trade deficit, U.S. policy is more helpful to
China than present Chinese policy is to the U.S. America's
outlandish budget deficit and the associated planned bond sales
constitute an attack on the value of Chinese held
dollar-denominated assets, which may exceed $1.5 trillion. This is
an especially indefensible blow within the Sino-U.S. economic
relationship because American per capita income is nearly
five times greater than that of the Chinese, even controlling
for purchasing power.
A Marriage of Convenience
Washington and Beijing are in a marriage of convenience, bound
together by many material advantages. When times were good, neither
could be bothered to address dysfunction in the relationship. Now,
each is looking to assign blame and find solutions without regard
for the broader impact of these measures. Such an atmosphere is
hardly conducive to establishing an effective G-2--the partnership
is not strengthening, but weakening.
Scissors, Ph.D., is Research Fellow in the Asian Studies Center
at The Heritage Foundation.
The G-20 convenes again this week, once more generating high hopes
that progress can be made in addressing the economic crisis. Due to
its size and diversity, the G-20 is an unwieldy body. Hence much of
the media spotlight has shone on smaller groups, such as the U.S.
and Western Europe.
Gardiner, "Barack Obama's European Tour: The President Must Protect
the Transatlantic Alliance," Heritage Foundation WebMemo No.
2370, March 30, 2009, at http://www.heritage.org/Research/Europe/wm2370.cfm.
Robert B. Zoellick and Justin Yifu Lin,
"Recovery Rides on The 'G-2,'" The Washington Post,March 6,
2009, at http://www.washingtonpost.com/
(March 31, 2009); C. Fred Bergsten, "A Partnership of Equals,"
Foreign Affairs, July/August 2008, at http://www.foreignaffairs.com/articles/64448/c-fred-bergsten/a-
partnership-of-equals (March 31, 2009).
bilateral deficit fell in on-year terms in November but rose in
December and again, slightly, in January, each month remaining
above $20 billion. U.S. Census Bureau, "U.S. International Trade
Statistics," at http://censtats.census.gov/sitc/sitc.shtml
(March 31, 2009).
Batson, "China Seeks More Involvement."
Major Foreign Holders of Treasury Securities,
Department of the Treasury/Federal Reserve Board, March 16, 2009,
.gov/tic/mfh.txt (March 31, 2009). Because investment into
the PRC is dropping and investment out is rising, there may be
fewer dollars on hand to buy U.S. treasuries regardless of
Beijing's intent or alternatives.
Associated Press, "China's CNOOC drops bid
for Unocal," MSNBC, August 2, 2005, at http://www.msnbc.msn.com/id/8795682/
(March 31, 2009). Perhaps worse was the rejection of Bain Capital's
acquisition of 3Com due to Huawei's minority role. 3Com then simply
moved its headquarters to the PRC. Press release, "Bain Capital
Terminates Merger Agreement with 3Com," Stanton Crenshaw
Communications for Bain Capital, March 20, 2008, at http://www.businesswire.com/portal/site/home/permalink/?ndmViewId
(March 31, 2009).
Andrew Batson, "China Stimulus Tweaks Don't
Redress Imbalances," The Wall Street Journal China Blog,
March 9, 2009, at http://blogs.wsj.com
/chinajournal/2009/03/09/1391/ (March 31, 2009); Report on
China's Central, Local Budgets, Xinhua, March 15, 2009, at
2009-03/15/content_1259811_8.htm (March 31, 2009).