While the petulant remarks of Russia’s PM Vladimir Putin blaming
the United States for the global financial crisis drew the most
attention at the annual World Economic Forum last week, it was
Wen Jiabao, Prime Minister of China, whose statement and
subsequent European trip carried the most economic and political
weight. Stung by the criticism of then Secretary of the
Treasury-designate Timothy Geithner’s written response to a
Senate committee question that the Chinese Government manipulated
the value of the “renminbi,” PM Wen launched a sharp
counterattack.
Wen lectured that the West had allowed its financial institutions
to be not properly restrained and that this had brought about a
broad economic culture of “low savings and high consumption” (his
words). It was quite obvious that Geithner’s attack on China’s
policy of high savings and convenient currency valuation had hit
a very sore spot in the Chinese official psyche.
The American treasury secretary’s objection is very simple. The
Beijing government, he says, purposely has kept the official
value of their currency from 15 to 40% below what would be
a free exchange rate. On top of that, the Chinese bureaucracy has
encouraged a program of both private and official savings to such
an extent that it runs counter to a modern state’s responsibility
to seek participation in a regime of a fair balance of trade.
China reportedly has foreign currency reserves of $2 trillion.
The Chinese exporters are said to sell their goods at
artificially low prices, thus enabling them to outbid American
and other Western firms. The charge of excessive savings is a bit
harder to evaluate for it is based on very different philosophies
of private, corporate and governmental wealth accrual.
The Chinese view credit as a short-term device and credit debt as
something that always should be restrained. The Western view is
that credit is part and parcel of economic life and that credit
debt is — or should be — related to an “acceptable” percentage
of gross domestic product in the national case or income and
savings/liquid assets in the personal.
The fact is that the Chinese system has enabled the U.S. to
pursue its predilection for growth through borrowing, at least in
regard to the Chinese government purchase of U.S. Treasury
securities. The Chinese now hold approximately $700 billion in
marketable and non-marketable American bills, bonds and notes.
Interestingly, that amount is $200 billion more than it was in
January ‘08. The current figure can be compared to the
approximate $2.4 trillion of U.S. paper held by all the rest of
the world’s nations combined.
While the purchase of U.S. government securities by China clearly
has made a considerable amount of capital available to the U.S.
Treasury, there are many American officials and academics who now
place a portion of the blame for the current economic crisis on
Beijing’s appetite for increasing its holdings invested in the
United States and other Western debt markets.
Obviously the Chinese are unapologetic for their actions and
consider the U.S. quite churlish in this complaint. To charge the
Chinese with anything less than prudent financial management is
perceived by Beijing to be the height of economic jealousy, to
say nothing of capitalistic sour grapes.
The fact is that China, like other Asian nations, is built for
export. Of course it cannot count indefinitely on the seemingly
insatiable demand for its products to continue. Eventually China
will have to turn inward and increase its domestic consumption.
To accomplish this it will have to make credit far more available
to its private sector. This is what Washington — clearly not the
best example of running a free market economy — is pushing so
hard for Beijing to do.
The Chinese point to an intent to spend about $600 billion over
the next two years as part of their own economic stimulus
program. Their objective is to maintain growth at over 8% a year.
Central planning in Beijing apparently views a high growth rate
as required to preserve socio-economic order without resorting to
the US/UK model of building consumer spending on the
“never-never,” the popular British term for credit dependency.
As annoying as Tim Geithner’s remarks about China’s currency
manipulations may have been, the truth is that China eventually
will have to invest more of its ample savings in itself, build a
legitimate self-sustaining economy, and accept its products
competing internationally at fair market value. Protectionism
doesn’t work for long in any form in a globalized world. This is
something that must be remembered by Washington as well as
Beijing.
