The creditor and the debtor

The creditor and the debtor
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First Published: Tue, Jun 02 2009. 09 08 PM IST
Updated: Tue, Jun 02 2009. 09 08 PM IST
If there ever was a sign of the intertwining of the US and Chinese economies, US treasury secretary Timothy Geithner’s visit to China proved it this week. With all the fresh talk about decoupling, the fates of China and the US still appear intertwined. We have to wonder if the fate of the rest of the world is tied to them.
Consider Geithner’s softer tone in Beijing. Since it assumed office, the Obama administration has taken to blaming China for “manipulating” its currency, referring to the fixed exchange rate in that country. Geithner seems to have forgotten that blame game, simply because he’s barely in a position to dictate terms to China now.
The last few months have seen a new debate emerge in economic circles on the dollar as reserve currency. China holds at least $760 billion in dollar-denominated US government securities. Little surprise, then, that recent US actions—Barack Obama’s enlarged fiscal deficit and the Federal Reserve’s inflated balance sheet—have provoked Beijing’s concerns. This debate may have been triggered by China’s central bank governor, but it’s surely left Washington even more jittery. Geithner made sure he emphasized that China’s dollar investments are “very safe”.
At the same time, no matter how much noise it makes, China is not about to make radical changes. It won’t unwind its US assets: The same week China’s central bank governor started the reserve currency debate, another senior official stressed that it wouldn’t sell US securities. More importantly, China isn’t trying to change its US dependent export-oriented ways: Its November $586 billion stimulus only reinforces the old economic model by doling out benefits to exporters.
Washington and Beijing are so interconnected now that any movement away from the status quo will be painful. That means the US, looking to have China finance its fiscal and external imbalances, will keep exporting its financial troubles to it. And that means China will keep its currency pegged, accumulating massive dollar reserves and continuing to push long-term interest rates downward.
The last time around, these factors played no small role in embroiling the rest of the world in the severest financial crisis since the Great Depression. What will it do now?
What does the US-China economic relationship mean for the rest of the world? Tell us at views@livemint.com
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First Published: Tue, Jun 02 2009. 09 08 PM IST