Transcripts

Commentary: The Bond Between the U.S. & China

SUSIE GHARIB: Tonight`s commentator says the United States and China have a co-dependent financial relationship. He`s Alan Blinder, partner in the Promontory Financial Group and former vice chair of the Federal Reserve.

ALAN BLINDER, FORMER VICE CHAIR, FEDERAL RESERVE: Chinese President Hu Jintao`s recent visit to the White House reminds U.S. of the unhealthy co- dependence that has developed between our two countries. In a nutshell, they need us to buy their goods, and we need them to buy our bonds. Everywhere I go these days, Americans ask whether they should worry about our mounting indebtedness to China. Are we relying on the kindness of strangers?

My answer is, no. Why? Because the Chinese are not buying all this American debt as a favor to us. Rightly or wrongly, they have concluded that doing so is in their own best interest. Why is that? Because buying dollar assets is how they hold down the value of the yuan, which helps them sell more goods on world markets, which in turn, is critical to sustaining Chinese economic growth and which in turn, is critical to propping up a political regime that derives its legitimacy from delivering rapid economic growth. And one thing the Chinese leadership cares mightily about is keeping itself in power.

Come to think of it, this co-dependence also helps sustain our political regime. The real worry is what happens if China stops buying our bonds. Without Chinese purchases, U.S. interest rates would be higher than they are and President Bush would be under more pressure to do something about the Federal budget deficit. So, ironically, China`s bond purchases are helping to prop up both China`s repressive political regime and America`s unsustainable fiscal regime. A neat trick. I`m Alan Blinder.