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.
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