China, U.S. locked in uneasy economic co-dependence

As President Obama begins his three-day visit to China on Monday, he finds himself in a country that depends largely on the United States as the most important market for its cheap goods. America, with growing budget deficits and a massive national debt, depends on China as the main holder of U.S. Treasury securities, with Beijing's stockpile officially estimated to be nearly US$800 billion.

The arrangement has created what many have called a modern economic version of the old Cold War doctrine of mutual assured destruction: Either side could wreak havoc on the other but would be guaranteed to scuttle its own economy in the process.

“We are in a fairly advanced stage of economic mutual interdependence,” said Kenneth Lieberthal, a China specialist with the Brookings Institution in Washington. “I think the Chinese can pull the rug out from under our economy only if they want to pull the rug out from under themselves.”

Some U.S. economists and members of Congress have expressed alarm about a loss of economic sovereignty, and America's now being “in hock” to China. The Beijing government could try to wreck the American economy by dumping U.S. Treasury securities, they warn, or move to influence U.S. policy on sensitive political issues, like Taiwan, with the threat of dumping securities.

But some of their Chinese counterparts fear that China's large holdings of U.S. debt amount to a financial tether, making China “a prisoner” of the U.S. dollar.

“We are really put in a corner,” said Yu Yongding, an economist with the Chinese Academy of Social Sciences. “China will not take any irrational action. We don't want to hurt you — because if we hurt you, we hurt ourselves first. It's a kind of synergy.”

Nicholas Lardy, a China expert with the Peterson Institute for International Economics, agreed that the Chinese government had little incentive to begin any large sell-off of U.S. securities, and probably could not find a market to buy them even if it did. “If it was known they were beginning to sell their holdings, prices would come down and they'd take bigger losses. They'd be shooting themselves in the foot,” he said.

Lieberthal said the fact that China holds so much U.S. dollar debt now makes it “extremely cautious” of any actions that might hurt the American economy — and damage its own massive investment. But unlike the Cold War, he said, the current economic version of a stalemate is not necessarily antagonistic; both sides currently benefit.

“I think it is neither of our interests to see that unravel,” Lieberthal said. “If we can find ways to manage our differences and cooperate where we can, we both win. If not, we both lose.”

1|2|Next Page>>

SharePrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email