The Face Value of Obama's First Visit to China

• Comments
• Print
• Email

As US President Barack Obama arrives in Shanghai, on a blustery, cold day, the American media has him portrayed him as hat in hand, offering reassurance that the US will be able to pay back the hundreds of billions it has cadged from China and trying to persuade China to pony up even more.

 

"When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker," states The New York Times in a lead article.

 

Even Chinese in the street can feel that the financial crisis has brought about a sea change in the balance between China and the US. Is US still "the" superpower or must it now share that stage with China? When Bill Clinton, and even the George W. Bush visited, China was eager to stabilize the bilateral relationship and the term "strategic partnership" seemed ubiquitous. Chinese leaders gave US presidents "face," releasing a dissident or two from the list the presidents had ready to hand. Face giving extended even to then-Treasury Secretary Hank Paulson. Whenever, as secretary, he dropped in on China, though he had done so dozens of times previously, the government would let renminbi (RMB), its currency, appreciate a bit to "welcome" him.

 

But this president, exuding charm and sporting the prestige of the most recent Nobel Peace Prize, comes shadowed by the cold, hard reality of the US economy: while the US recently reported a healthy 3.5% third quarter GDP growth, suggesting that the most severe recession since the Great Depression is over, the American economy is acknowledged to be weaker than official data suggest. "The story of the US is one of two economies �a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn," says Nouriel Roubini, Chairman of RGE Monitor and Professor at the Stern School of Business, New York University.

 

Most importantly, Washington cannot afford to seriously anger China, which it needs to continue funding a budget deficit that hit $176.4 billion in October alone, a monthly record.

 

At the very same time, China was seeing its rebound solidify. Industrial output growth was 16.1% year on year, up 7.9 percentage points. While the US car industry is shrinking, China produced 1.31 billion automobiles, 78.6 % year on year growth. As the US and other western countries are looking at a bleak holiday shopping season, China sees its own domestic consumption, driven by car and house markets, growing robustly, with retail growth up 16.2% in October.

 

China is quite capable of lending more to the US. The accumulation of China's foreign exchange reserves is actually accelerating. By the end of Q3, forex reserves amounted to US$2.2726 trillion, up 19.26%, year on year. In the first three quarters, forex reserves grew by US$326.6 billion, with a Q3 increase of $141 billion. Such capital inflow is likely to continue. With China holding more USD, and US government needing more, the creditor-debtor tie will deepen and exert large pressure on the structure of China-US relations.

 

Meanwhile, China is pushing to encourage greater international use of RMB and is implicitly targeting 2020 as the date by which it should become one of the world's leading currencies. "That is an ambitious goal," says Barry Eichengreen, Professor of Economics at the University of California, Berkeley, "but US history suggests that it is not impossible to achieve,"

 

Bill Clinton's watchword on China was "engagement," while to Bush Jr it was "responsible stakeholder." What, then, is the Obama administration's approach to be? Deputy Secretary of State James B. Steinberg, who has deep roots in China policy, argued this fall that China needed to adopt a policy of "strategic reassurance" to the rest of the world.

 

"Strategic reassurance rests on a core, if tacit, bargain," Mr. Steinberg said. "Just as we and our allies must make clear that we are prepared to welcome China's 'arrival,' " he argued, the Chinese "must reassure the rest of the world that its development and growing global role will not come at the expense of the security and well-being of others."

 

But the US must also hold itself responsible and reassure China that will continue to be a good debtor. As a lender, China is doing ever more "due diligence" on both its biggest borrower and the issuer of USD assets: the White House, Treasury, Congress and its budget office, as well as Wall Street and US economy at large.

 

As a banker, China feels it increasingly necessary to examine Obama's spending of its borrowed money, e.g. Wall Street bailout packages, healthcare programs, wars in Iraq and Afghanistan. Will China use its stepped up "due diligence" to exert pressure on US domestic and foreign policies the Obama administration wants to spend on? As banker to lender, this would be common. It is as power to power that things get interesting, especially if China tries to use its lending leverage to pressure US spending away from things it deems to undermine its interests.