China - US Economic Relations

IntroductionBudget deficit control
This is an attempt to look at the economicFollowing the financial crisis and the implementation
aspect of US - China relations from a Chineseof stimulus measures the primary concern of
perspective. This approach may yield interestingChina is the US government's resolve and ability
insights in the most important economic axis ofto bring the budget deficit under control. From the
economic interdependence of the modern world,perspective of Chinese national interest their ability
and generate innovative ideas about how toto deal with the adverse effects of the global
approach existing and future issues.financial crisis depend on the value of their national
Theoretical backgroundreserves which is dependent on US policies.
The contemporary phase of US-ChineseCommentators speculate on whether China will
relationship characterized by high level ofcontinue to buy US securities to and thus finance
economic interdependence can be analyzed fromUS government spending. The obvious answer is
a realist perspective. Henry Kissinger was workingyes because there is no substitute for US
towards a classic "realist" balance of powergovernment bonds in terms of secure investment
arrangement by seeking closer relationship witheven when taking into account all the pitfalls of
China to counterbalance Soviet influence in Asiausing them as financial reserve instruments. A
after the end of the Vietnam war. In Dr.logical consequence of improving trade balance
Kissinger's own words with Nixon they "had ideasbetween China and the US will be that China will
for the construction of peace on a global scale".buy less US securities as it will have less free
Consequently it could be argued from afunds to use for bonds purchases but will use the
constructivist perspective that this classic 'realist'money gain from export to the US to pay for
foreign policy act created a reality that willimports instead. To conclude if China had a
develop into the most remarkable phenomenon offinancially viable option to switch reserves to
modern politics the economic interdependenceother safe haven like IMF Special Drawing Rights
between the world's leading liberal free marketor Euro they would have done so and they will
democracy and the last explicitly communist state.not hesitate to do it if it becomes viable in the
The impressive rise of the economic exchangefuture. The current calculations though make the
between the two countries after the reformsUS dollar most attractive despite its contradictory
introduced by Deng Xiaoping in 1979 led to theposition of serving as an international currency but
current situation in which they dominate worldheld under US national control. China will continue
trade and global economic stability is dependent onto keep their national reserves in US dollars and
their successful development. The managementattempt to influence the US government to
of these relations and the interlinked political andpursue policies that will prevent the dollar from
security implications require skillful economiclosing value.
statecraft to resolve the issues bound to ariseFree trade not protectionism
from the unparalleled scope of the economicThe other most important economic statecraft
interdependence and the structural differencespolicy issue that China would like to see positively
between the communist rule over an economy inresolved in their relations with the US is how the
transition to free market in the case of China andadministration will go about with dealing with
an economy in transition from the 'laissez-faire 'protectionist pressures from Congress. China is
principles of the Reagan era to increasing calls forunderstandably suspicious on the true US
more regulation after the global financial crisis ofintentions. On one side we have the resolute
2008.declarations of president Obama on several G20
Historical Contextmeetings warning against the dangers of
The relationship between US and China began toprotectionism and on the other the controversial
develop in in a new direction after Henry Kissingerimposition of tariffs on tires imported from China.
approached China and the economic relationshipNew US financial regulations to prevent crises
picked up particularly after the reforms of DengChina is concerned with the negative impact of
Xio Ping in 1979. Trade with the US has helpedthe current financial crisis that has exposed their
China achieve dramatic success in improving theeconomic vulnerability to events beyond their
quality of life of the most populous country in thecontrol. Understandably, China wants to see
world. Chinese political life has advanced towardsbetter regulation to ensure the smooth operation
more openness, democracy and accountability andand predictability of the US financial system as
the protection of private property has given thethe world trade is dependent on its health.
opportunity for a prosperous middle class toIncreased role for China in IMF
emerge. At the same time China remains aAt the 20th meeting of the International
Communist country ruled by Communist PartyMonetary and Financial Committee of the Board
which is far even from the notion of somethingof Governors of the International Monetary Fund
resembling Gorbachev's perestroika, let alonein Istanbul the Deputy Governor of the Central
more comprehensive political reforms. TheBank of China Yi Gang made a point for a larger
remarkable economic development has beenquota for the developing nations and better
accompanied by extensive environmental damage.monitoring abilities for the International Monetary
Some of the new rich have earned their wealthFund. He accused the IMF of failing to foresee the
through corruption and the lack of effectiveglobal financial crisis and blamed this failure on
judiciary to deal with the problem is due in part tomismanagement stemming from skewed
the CCP opposition to political reform. Therepresentation in IMF governing bodies. That is a
livelihood of a large part of the population thoughvalid Chinese complaint as they have done what
better than the starving populations ofwas expected from them: efficiently produced
sub-Saharan Africa is still precariously close to thegoods for export and the financial collapse
poverty line. The economic development is basedadversely affected them without warning. That
on cheap labor and has yet to show signs ofthe IMF is in need of structural and administrative
achievement into more technologically advancedreform including quota revision is acknowledged
areas as Japan, and the Asian Tigers have done.supported by the US government.
The US approach to China has ranged from theRecognition of the status of China as a market
desire to ensure good relations to alleviate theeconomy.
security threat in the 70s through the remarkableThe recognition of China as a market economy
period of the growth of economic relationsaffects the way the fair market value of goods is
starting with Deng's reforms and culminating incalculated to determine whether the country
China gaining the top spot among US tradingengages in subsidies or dumping. As China is not
partners and world wide prominence leading to USrecognized as a market economy by its main
uncertainty as to how to treat China: as a rival, antrading partners the US and the EU they can
ally or controversial partner-difficult to deal withmore easily apply punitive measures against China
but impossible to reject.as was in the latest case of US tariffs on tires
Floating exchange rage for Chinese currency.imported from China. Theoretically the question
The Chinese government has strongly resistedhas two sides. The first one is can China be
international pressure led by the US to floatconsidered a market economy? The prevalence
Chinese currency. The Chinese complain that nowof state enterprises and the strict control over
after the financial crisis the problem is not thethe national currency points towards a negative
exchange rate of their currency but the value ofanswer. On the other hand the remarkable
the dollar or more correctly not the value but thedevelopment of China towards establishing
stability of the dollar which is dependent on theefficient enterprises including private ones
stability of US policy. The above conclusion of thesuccessfully working towards ever increasing
Wang Qing, an economist from Morgan Stanley inexport capacity points to a conclusion that China
Hong Kong make the US government responsibleis making considerable effort to implent an
for exchange rates linking their stability with themarket driven system. The results of the latest
stability of policy. While a link between policy andChina - US Strategic Dialogue show that there are
currency values may be established it is not thatno insurmountable obstacles on the way of US
direct. There was no observable policy changerecognition of China's market economy status
when the financial crisis struck in the latter dayswhich will materialize sooner or later depending on
of the Bush administration. It is more thepolitical developments in both countries.
adequacy of particular policy that may affect theWhile official Chinese policies may be concerned
exchange rate. In any case the huge Chinesewith the continuing dominance of the Communist
trade surplus has materialized in US dollars mostlyParty and Marxist ideology from the Russian (and
in the form of Treasury bonds.Yugoslav) experiences suggest that the true
"We have lent a huge amount of money to theinterests of the ruling elite may be the more
U.S. Of course we are concerned about thematerial than ideological centering on the
safety of our assets. To be honest, I amperpetuation of their economic power. The
definitely a little worried." The problem is that Themetastasis of corruption feeding on China's
Chinese cannot undertake a massive sellout of USeconomic boom points int that direction Bearing
treasury bonds as this will cause their price to fall.that in mind three scenarios can be discerned for
But even if they hold them massive US stimulusthe future development of China. The most
will mean the US government selling more bondsdesirable, but maybe not the most probable will
and the market may demand higher interest ratebe the gradual political development of the
for them than the interest rate for the bonds theChinese society towards democracy following the
Chinese hold. That scenario will result in a priceconsolidation of the market principles in the
drop of bonds held by the Chinese. Alternatively ifeconomy. The most dangerous would be a slip
the US government chose to limit the borrowingbackwards under the pressure of economic
and respectively the stimulus may mean slowerduress into the oppression and belligerence of the
recovery for the US economy which will hurtMao era. The most probable though will be the
Chinese exports to the US. Another scenariocollapse of the Communist party and transfer of
involves reduced US trade deficit because of thepower into the hands of corrupt officials and
crisis resulting in less Chinese purchases of USmafia like structures. US inducement for
bonds. In any case the financial crisis confrontsdemocratic reforms in China may diffuse the
the Chinese leaders with a difficult dilemma. Thedangers of chaotic collapse of communism and
US sees the solution in encouraging Chinesethe and the considerable security implications that
domestic consumption. The Chinese governmentmay cause. Ultimately it can be concluded that
sees a solution in decreasing its reliance for itsthere is a convergence of interests between the
reserves on the US dollar and dependence on USChinese Communist Party, the entrepreneurs and
financial policies outside its control, by callingthe people of China and that leads to peaceful
(alongside Russia) for the establishment of aneconomic development as a way to solve all
internationally managed reserve currency that willproblems facing modern China. That position can
increase the stability of world financial marketsfind understanding in the US and the rest of the
and have the added benefit of more freedom forworld because it is in harmony with the long term
the financial policies of reserve currency politiesinterests of all countries interested in developing
like the US, the EU and Japan.economic relations with China on a win-win basis.
2. What China expects from the US