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How Will Market Volatility Affect U.S.-Chinese Economic Relations?

August 19, 2011 at 12:00 AM EDT
Vice President Biden tried to shore up Chinese confidence in the U.S. economy on Friday, telling President Hu Jintao that when it comes to China's investments in the U.S., "You have nothing to worry about." Jeffrey Brown discusses U.S. and Chinese economic relations with MIT's Yasheng Huang and Commentary.com's Gordon Chang.
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JEFFREY BROWN: And for more on the U.S. and China amid the current financial turmoil, we go to Yasheng Huang, professor of international management at MIT’s Sloan School of Management. He’s the author of “Capitalism With Chinese Characteristics.” And Gordon Chang, an author whose books include “The Coming Collapse of China,” he was a lawyer in China and Hong Kong for 20 years, and now writes a blog on Commentary.com.

Yasheng Huang, what is going on in these meetings in Beijing? It looks a lot like attempts at mutual reassurance.

YASHENG HUANG, MIT Sloan School of Management: Well, I think there are several things going on.

One is that Vice President Biden wants to gauge his Chinese — the other side — on the other side who is going to be the president of the country come 2013. The other thing, as you pointed out, is that he wants to convey to the Chinese that the U.S. is going to honor the obligations to the Chinese. And Chinese are the biggest holder of the U.S. Treasury debt.

So, that assurance is very, very important. I’m not sure how convincing he is, given that his hands are tied by the Republicans in the Congress, but that assurance is very, important for the United States to convey to the Chinese.

JEFFREY BROWN: Well, Gordon Chang, what do you see? Because as we said, not very long ago, there was this very public scolding of the U.S. in Xinhua, the news agency — today, more reassurance.

So, what — how do you see it?

GORDON CHANG, Commentary.com: Well, yes.

Clearly, Vice President Biden wants to make the Chinese comfortable. But we have got to remember that the United States is in trouble in large part because of the global imbalances in the world, and the Chinese are not permitting the adjustments that must occur. So, for instance, they’re fixing the value of their currency, which means that manufacturing is artificially encouraged to come to China.

They have all sorts of other predatory trade practices. And so I think Vice President Biden should be calling the Chinese on this to say, well, if you want us to be better, you have got to be better.

JEFFREY BROWN: But, staying with you, given the situation with the Chinese holding so much of the U.S. debt, what are the implications of that amid this market turmoil?

GORDON CHANG: Yes, I don’t think that that actually gives the Chinese that much leverage, because you have got to think about the way the global markets operate.

You know, if the Chinese don’t buy debt, well, they have got to, because their economy is geared to selling things to us. And if they want to sell our debt to hurt us, they have got to buy other things, like euros, pounds and yen. That’s going to drive those currencies soaring, which means that Brussels, London and Tokyo have got to go out in the global markets to bring their currencies back down in value.

And that means the Chinese really don’t have a weapon. So we have a lot of ability to deal with this.

JEFFREY BROWN: Yasheng Huang, how do you see that?

YASHENG HUANG: I disagree with that.

I agree with Gordon that the Chinese could do more. But they have done, I think, within their political and economic situation, as much as they can. The Chinese currency did appreciate from 2005 to 2008, and then it stopped appreciating since 2008, but it began to appreciate a little bit this year once again.

And Chinese inflation is picking up. So the effective exchange rate of the Chinese currency is actually appreciating more than the nominal exchange rate. And the Chinese trade surpluses are declining relative to the size of the GDP.

So, I agree with Gordon that the Chinese can do more, but it is not the case that they are resisting changes. I think the bigger change they can do is really within the domestic economic management. They should get the domestic consumption up. They should reduce the pace of the investment. They are not willing to do that. That, I’m worried about.

JEFFREY BROWN: Well, let me ask — the other side of this, of course, amid all this economic worry around the world is, if there’s no growth or slow growth in the U.S. and Europe, a lot of people are still looking to China as the potential economic engine.

So, Gordon Chang, starting with you, the perception, of course, has been that China is this dynamo. Is that still true?

GORDON CHANG: No, it’s not true and it’s never been true.

China has not been the engine of world growth. I mean, to be an engine of growth, you have got to accept imports to create manufacturing in other countries. China is an exporter. And because of its predatory policies, a lot of that manufacturing which now occurs in China should be occurring elsewhere.

And, also, they have problems with their domestic consumption, which is not growing as fast as it should. And imports in China, which would create growth elsewhere, to be a real engine of world growth, they’re not growing as fast as they should.

So the real engine of world growth remains the U.S. consumer, who is just about tapped out, by the way, and that’s a real problem for China, because, last year, 149.2 percent of China’s overall trade surplus related to sales to the United States.

JEFFREY BROWN: Well, Yasheng Huang, weigh in there. Do you see more potential for positive growth from China?

YASHENG HUANG: The imports into China are increasing, and the imports from the United States into China are also increasing.

I think the bigger problem is not so much the import, per se. The bigger problem is that the Chinese are importing from the wrong places. They’re importing from Brazil. They’re importing from Africa, pushing up the prices of the commodities. And they are not importing as much from the developed economies as they should, as Gordon pointed out.

But I think the fundamental issue is not the international rebalancing. The fundamental issue is the domestic rebalancing. Arguably, in the last three years, the Chinese government has made the matter worse because they are increasing investment. And relative to the pace of the investment growth, the domestic consumption is not growing as fast, even though domestic consumption is growing, but it’s not as fast as the investment growth.

So I worry that, in two to three years, the investment is going to peak, and then what is there left? The consumption is not there to pick the — the engine of the growth.

JEFFREY BROWN: Well, coming back — Gordon Chang, coming back to this question, though, at a moment like this, who needs whom — who needs who most of all at this? So, when we go there, and we say, we reassure you everything is OK here, and they seek reassurances from us, weigh that balance for us.

GORDON CHANG: Well, they need us so much more, because their economy is geared to selling things to us.

And our problem — we say, oh, they need to buy our debt. But our problem is not that there are not enough people in the world to buy Treasury securities. Our problem is there’s been too many people willing to do that, which has not permitted the discipline in Washington.

So, you know, you have got to remember that on the Monday after the S&P downgrade, you know, what were the favorite investments in the world? Gold, Swiss francs and U.S. Treasuries. U.S. Treasuries, we’re going to be OK even if the Chinese stopped buying. But they can’t do that because they’re selling things to us. They get dollars. They need to put them someplace. The only place to put them is Treasuries.

JEFFREY BROWN: Well, Yasheng Huang, a brief last word.

We still — well, weigh in. We still need them in some part, right?

YASHENG HUANG: Oh, we do.

The Treasury bond is a very important source of financing for the U.S. growth. And, also, U.S. corporations depend very heavily on the growth in the emerging markets such as China and India. So, it is — I wouldn’t test the hypothesis advanced by Gordon that we don’t need the Chinese. I think the U.S. economy is in too fragile a state to test that hypothesis.

JEFFREY BROWN: All right, Yasheng Huang, Gordon Chang, thank you both very much.

GORDON CHANG: Thank you.

YASHENG HUANG: Thank you.