Sunday, March 15, 2009

Is China sending warning signals to the US government? If so, about what?

Josh Marshall at TPM (among others) asks some interesting questions about how to interpret some recent Chinese moves. These question may be overly speculative, in a neo-Kremlinological way ... or maybe not.
If you remember, not long after President Bush became president, we had that incident with the US spy plane hugging Chinese airspace, which was bumped by a Chinese jet intercepter and forced to make an emergency landing on Chinese territory. Then just days ago we had a strangely similar incident at sea. Again, just a few months into the tenure of a new president.

Now we have Chinese Prime Minister Wen Jiabao publicly worrying about the safety of the almost $1 trillion of US Treasuries China owns. That they'd have some concern isn't surprising. But having the head of government sound the warning bell is hardly the best approach to preserving confidence in US debt.

This strikes me as all of a piece, pretty unsubtle signaling of a shifting balance of power.

Certainly, it is worth noting that China's export driven economy and massive build up of capital reserves were the fuel behind the US housing bubble. And China's own continued growth is dependent at least for now and for some time into the future on a very receptive US market for its goods. We're in a toxic but mutual embrace.
Dan Drezner's take on the matter left out the naval bluffing, focused on the "verbal shot across the bow of U.S. asset markets," but emphasized that neither side can really afford to let go of that mutual embrace.
Chinese premier Wen Jiabao, in his annual press conference, fired a verbal shot across the bow of U.S. asset markets:
Speaking at a news conference at the end of the Chinese parliament’s annual session, Mr. Wen said he was “worried” about China’s holdings of Treasury bonds and other debt, and that China was watching United States economic developments closely.

"President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

He called on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”
When a country that owns $1 trillion of your debt starts making these noises, it's time to fidget a little.

Or is it? I'll have more to say about this later, but for now it's worth pointing out that China's financial leverage over the United States might not be as great as people think. The Wall Street Journal's Andrew Peaple explains why:
Rhetoric aside, it bears repeating that China will find it hard to make a meaningful shift out of Treasurys, the prime current channel for investment of its $1.95 trillion foreign exchange reserves.

Some say China could switch holdings into gold -- but that market's highly volatile, and not large enough to absorb more than a small proportion of China's reserves. It's not clear, meanwhile, that euro, or yen-denominated debt is any safer, more liquid, or profitable than U.S. debt -- key criteria for China's leadership.

Most pertinent of all, even if China decided to sell off some of its U.S. Treasury holdings, it would scarcely be able to dump that in large blocks. And a partial selloff would surely lead to a slump in the Treasury market, eroding the remaining value of China's portfolio.

It seems safe to conclude that the Chinese government is feeling jittery about the state of the US economy, which is not surprising, and no doubt concerned about China's economic prospects, too. But if this was an attempt to send a warning to the US government, it's not clear just what they might be warning the Obama administration that it should or shouldn't do.

And--a question no one seems to have quite asked explicitly--about what? Economic policy? Could be, but that's not self-evident. Tibet? Taiwan?

I guess we'll see. This may or may not come to nothing, but it seems intriguing and worth noting.

--Jeff Weintraub

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