HONG KONG — Some Chinese see U.S. Treasury Secretary Timothy Geithner, who was in Beijing this week, as a repentant debtor humbly visiting his bank manager. Influential Americans, however, see the visit as the start of a beautiful friendship, perhaps even a tipping point in global finance — the overture to the establishment of a Group of Two (G-2) economic giants, which will do a better job of directing the global economy than either the current Group of Seven (G7) or the ambitiously unwieldy Group of 20.
There is a compelling logic in the idea of economic partnership between the United States, the biggest economic power on Earth, and China, now the third- or maybe second-biggest economy but destined to be No. 1 in 20 or 30 years time. The fact that China — in defiance of hitherto accepted norms of international economics of a developing country — is the biggest creditor to the heavily indebted U.S. adds a certain piquancy.
Coincidentally, Brad Setser of the Washington think tank Council on Foreign Relations calculates that China’s foreign assets may be worth $2.5 trillion, a cool $500 billion more than usual estimates. Besides formal reserves of $1.946 trillion, there is $252 billion in portfolio debt held mainly by state banks, plus another $186 billion “in a mysterious line item that corresponds with the banks’ dollar reserve requirements and . . . other foreign assets.” Also, China Investment Corporation holds up to $100 billion.
Within the portfolio, China has increased its holdings of U.S. treasuries, the safest and most liquid of U.S. securities, allowing China to switch easily to other assets when the moment is ripe. Indeed, China is pursuing a twin-track policy of buying treasuries for flexibility and commodities for security.
China seems to have woken up to the thought, variously attributed to John Maynard Keynes and John Paul Getty, that if you owe your bank $100 or $1,000, that’s a problem for you, but if you owe your bank $1 million, that’s a problem for the bank.
An Xinhua article Sunday cited a poll of “23 famous Chinese economists” of whom 17 said the country’s U.S. holdings “pose great risks to China’s economy.” But the critics did not advocate selling out.
Geithner’s flacks have worked hard to present him as a Putonghua-speaking friend of China, not the man who asserted in writing during his Senate confirmation hearings that President Barack Obama “believes that China is manipulating its currency.” Unnamed officials claim that sentence was “a mistake,” a phrase inserted by a junior-level official. It is not pleasant to see a key figure in the Obama administration wriggling away from responsibility this way. Was it political misjudgment on Geithner’s part, or carelessness in not checking what was going out under his name?
The problem for Geithner and China is that the issues remain the same: (1) China can’t sell its U.S. treasuries without taking huge losses leading to an appreciation of the yuan; and (2) with its massive $1.85 trillion budget deficit this year, the U.S. must continue to offload treasuries on the world, and it wants to see continued appreciation of the Chinese currency to help it export more to China.
China continues to count the cost. Bond vigilantes have helped send U.S. government securities down by 4.3 percent this year, while Geithner’s “strong dollar” fell by 4.9 percent in May.
Is this a case of nonidentical Siamese twins joined at the stomach, liver and kidneys, but not at the heart or head? Their mutual interests lead some prominent figures to argue that a G-2 will create a better world. Zbigniew Brzezinski, national security adviser under President Jimmy Carter, first suggested it.
But the idea of a G-2 gained traction when a prominent American and a Chinese joined forces. Robert Zoellick, president of the World Bank, and Justin Lin Yifu, his colleague and the bank’s chief economist, argued in the Washington Post that: “For the world’s economy to recover, these two economic powerhouses must cooperate and become the engine for the G20. Without a strong G-2, the G20 will disappoint.”
They added that “economic interdependency is stark.” In obvious ways the U.S. and China are mirror images of each other: The U.S. is China’s biggest export market, and China buys most U.S. government debt. Unless both sides address the imbalances together, there is a risk of repeating the mistakes that created the crisis. But it would be dangerous to jump from the view of G-2 meetings as an important part of a solution to that of the G-2 as the savior of the world’s economy. The G-2 may be necessary, but it is not a sufficient solution.
It is unthinkable to imagine solutions to the vast problems of the world — from economic recovery to creation of a greener, cleaner world — without involving Europe, Japan, India, Latin America, the major oil producers and sub-Saharan Africa. Yet, none of the above players has yet made a contribution to a global vision.
Japan is retreating into claims that its island culture is unique, when it should be looking at its own experience to suggest ways of pulling Asia together. After all, with its own large stock of U.S. treasuries and with a currency that is vulnerable to fluctuations in the dollar, Japan is not an idle spectator. Japan cannot afford to see itself apart from the Asian continent — unless it wishes to see China dominate. Tokyo should be looking also toward India, not to antagonize China, but to see how the democratic and entrepreneurial traditions of the two can blend and lend new dimensions to Asia’s search for its 21st-century identity.
Besides economic and financial objections to a G-2, there is a political mine field to navigate. The Chinese magazine Liaowang has suggested that a G-2 “would do more harm than good,” not least because, it said, America will never cede control of the world order and China, heeding Chairman Mao Zedong’s dictum, will never seek to exert hegemony. Quite.
Kevin Rafferty is editor in chief of PlainWords Media (email@example.com).
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