Felix Stalder on Fri, 26 Dec 2008 16:32:02 +0100 (CET)

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<nettime> Dollar Shift: Chinese Pockets Filled as Americans Emptied

[This is the last third of a NYT article about an issue I understand less
and less. Why are the Chinese continuing to buy US debt particularly now
that the yield is effectively zero? The short term logic is understandable
and well explained below. To keep the system going.  But what about the
long term? Contrary to what this article suggests, I doubt that this is
going to last forever. But how is this going to break? Through massive
inflation and much higher interest rates? This is all puzzling to me, even
if I suspect this is a key piece of the puzzle. Felix]


This [China buying US public debt] not only allowed the United States to
continue to finance its trade deficit, but, by creating greater demand
for United States securities, it also helped push interest rates below
where they would otherwise have been. For years, China's government
was eager to buy American debt at yields many in the private sector felt
were too low.

This financial and trade embrace between the United States and China
grew so tight that Niall Ferguson, a financial historian, has dubbed the
two countries Chimerica.

"Tiptoeing" Around a Partner

Being attached at the hip was not entirely comfortable for either side,
though for widely differing reasons.

In the United States, more people worried about cheap Chinese goods than
cheap Chinese loans. By 2003, China's trade surplus with the United
States was ballooning, and lawmakers in Congress were restive. Senator
Graham and Senator Charles E. Schumer, Democrat of New York, introduced
a bill threatening to impose a 27 percent duty on Chinese goods.

"We had a moment where we caught everyone's attention: the White
House and China," Mr. Graham recalled.

At the People's Bank of China, the central bank, a consensus was
also emerging in late 2004: China should break its tight link to the
dollar, which would make its exports more expensive. Yu Yongding, a
leading economic adviser, pressed the case. The American trade and
budget deficits were not sustainable, he warned. China was wrong to keep
its currency artificially depressed and depend too much on selling cheap

Proponents of revaluation in China argued that the country's
currency policies denied the fruits of prosperity to Chinese consumers.
Beijing was investing their savings in low-yielding American government
securities. And with a weak currency, they said, Chinese could not
afford many imported goods.

The central bank's English-speaking governor, Zhou Xiaochuan, was
among those who favored a sizable revaluation.

But when Beijing acted to amend its currency policy in 2005, under heavy
pressure from Congress and the White House, it moved cautiously. The
renminbi was allowed to climb only 2 percent. The Communist Party opted
for only incremental adjustments to its economic model after a decade of
fast growth. Little changed: China's exports kept soaring and
investment poured into steel mills and garment factories.

But American officials eased the pressure. They decided to put more
emphasis on urging Chinese consumers to spend more of their savings,
which they hoped would eventually bring the two economies into better
balance. On a tour of China, John W. Snow, the Treasury secretary at the
time, even urged the Chinese to start using credit cards.

China kicked off its own campaign to encourage domestic consumption,
which it hoped would provide a new source. But Chinese save with the
same zeal that, until recently, Americans spent. Shorn of the social
safety net of the old Communist state, they squirrel away money to pay
for hospital visits, housing or retirement. This accounts for the
savings glut identified by Mr. Bernanke.

Privately, Chinese officials confided to visiting Americans that the
effort was not achieving much.

"It is sometimes hard to change successful models," said Robert
B. Zoellick, who negotiated with the Chinese as a deputy secretary of
state. "It is prototypically American to say, 'This worked well,
but now you've got to change it.'"

In Washington, some critics say too little was done. A former Treasury
official, Timothy D. Adams, tried to get the I.M.F. to act as a watchdog
for currency manipulation by China, which would have subjected Beijing
to more global pressure.

Yet when Mr. Snow was succeeded as Treasury secretary by Henry M.
Paulson Jr. in 2006, the I.M.F. was sidelined, according to several
officials, and Mr. Paulson took command of China policy.

He was not shy about his credentials. As an investment banker with
Goldman Sachs, Mr. Paulson made 70 trips to China. In his office hangs a
watercolor depicting the hometown of Zhu Rongji, a forceful former prime

"I pushed very hard on currency because I believed it was important
for China to get to a market-determined currency," Mr. Paulson said
in an interview. But he conceded he did not get what he wanted.

In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to
Beijing. Mr. Bernanke used the occasion to deliver a blunt speech to the
Chinese Academy of Social Sciences, in which he advised the Chinese to
reorient their economy and revalue their currency.

At the last minute, however, Mr. Bernanke deleted a reference to the
exchange rate being an "effective subsidy" for Chinese exports,
out of fear that it could be used as a pretext for a trade lawsuit
against China.

Critics detected a pattern. They noted that in its twice-yearly reports
to Congress about trading partners, the Treasury Department had never
branded China a currency manipulator.

"We're tiptoeing around, desperately trying not to irritate or
offend the Chinese," said Thea M. Lee, public policy director of the
A.F.L.-C.I.O. "But to get concrete results, you have to be

An Embrace That Won't Let Go

For China, too, this crisis has been a time of reckoning. Americans are
buying fewer Chinese DVD players and microwave ovens. Trade is
collapsing, and thousands of workers are losing their jobs. Chinese
leaders are terrified of social unrest.

Having allowed the renminbi to rise a little after 2005, the Chinese
government is now under intense pressure domestically to reverse course
and depreciate it. China's fortunes remain tethered to those of the
United States. And the reverse is equally true.

In a glassed-in room in a nondescript office building in Washington, the
Treasury conducts nearly daily auctions of billions of dollars'
worth of government bonds. An old Army helmet sits on a shelf: as a
lark, Treasury officials have been known to strap it on while they
monitor incoming bids.

For the past five years, China has been one of the most prolific
bidders. It holds $652 billion in Treasury debt, up from $459 billion a
year ago. Add in its Fannie Mae bonds and other holdings, and analysts
figure China owns $1 of every $10 of America's public debt.

The Treasury is conducting more auctions than ever to finance its $700
billion bailout of the banks. Still more will be needed to pay for the
incoming Obama administration's stimulus package. The United States,
economists say, will depend on the Chinese to keep buying that debt,
perpetuating the American habit.

Even so, Mr. Paulson said he viewed the debate over global imbalances as
hopelessly academic. He expressed doubt that Mr. Bernanke or anyone else
could have solved the problem as it was germinating.

"One lesson that I have clearly learned," said Mr. Paulson,
sitting beneath his Chinese watercolor. "You don't get dramatic
change, or reform, or action unless there is a crisis."

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