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.[3] 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.[4] 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.[5] 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 greenback.
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.[6] While posturing against protectionism,[7] 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.[8] 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.[9] Foreign companies continue to be unable to buy Chinese companies, as demonstrated with the rejection of Coke two weeks ago.[10]
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.[11] 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.[12]
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 growth.
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.[13] That means the chief tool is bank lending, as seen in a loan surge since October.
Faster Lending
Bank loans overwhelmingly go to firms, not individuals.[14] 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.[15] 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 export.
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.
Derek Scissors, Ph.D., is Research Fellow in the Asian Studies Center at The Heritage Foundation.
