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Updated Tuesday, October 20, 2009 9:21 am TWN, The China Post news staff

Pres. Obama may forge stronger bond with Beijing on China trip

Last Friday, the U.S. Treasury announced that the federal budget deficit in fiscal year 2009 ending September 30 reached US$1.4 trillion, or 10 per cent of gross domestic product, the largest deficit-to-GDP ratio since World War II. In contrast, the Clinton era had a budget surplus, and George Bush had only a 3.2 percent deficit-to-GDP ratio, or US$459 billion, when he left office. And the outlook appears bleak. The accumulated government debt will reach US$12 trillion, or 85 percent of GDP, this year. It might balloon to US$21 trillion in a decade.

Who is to pay for the deficit? Foreign investors in U.S. debt, and China is by far the largest buyer of Treasurys, totaling about a trillion U.S. dollars. America needs China's hard-earned cash from its exports to the United States, which has been the mainland's largest market for decades.

While the relationship is mutually dependent, Beijing has reason to worry about the safety of their huge investment in U.S. debt. Remember what Wen Jiabao said last March in Beijing? “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried.” His worry was not unfounded, though, as the value of the dollar has kept falling due to Washington's out-of-control spending, making China's investment worthless over time.

Will Beijing continue to buy the weakening dollar? The answer, strangely, is probably yes, although with perhaps more caution and diversification. Despite the global recession, China's foreign exchange reserves have kept growing, to US$2.3 trillion so far, mostly from the surplus of its unbalanced trade with America. China and America need each other, like a drug dealer needs an addict, as some economists have described.

When Obama visits Beijing next month, he is expected to ask the Chinese to invest more in Treasurys, and he may reach some sort of quid pro quo with his host, like a reiteration of U.S. support for one China, as well as opposition to protectionism. Obama, the new Nobel peace laureate, should return home with a stronger partnership with China, which he needs as an ally of sorts to carry out his agenda of “change” that the troubled world is awaiting with fervent expectations.

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November 13, 2009 USPOEC@

China will continue to play this charade as it can't make drastic moves which would rapidly cause the value of the dollar to crash. I assume they are buying commodities as fast as they can while propping up the dollar. At some point the scale will tip and after they own a large portion of the world’s commodities, they will say, SCREW THE DOLLAR, and how much is our commodities worth in Euros or gold. Or maybe they will say, let us attack Taiwan and we will call it even.


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