Wrapping up the bilateral economic talks, U.S. Treasury Secretary Hank Paulson called them full of “straightforward back-and-forth”, while his counterpart Vice Premier Wang Qishan used the phrase “constructive, candid and pragmatic.” (Xinhua’s report on $20 billion trade aid and other agreements here.)
The global financial crisis dominated the meeting, giving Chinese officials an opportunity to lecture the U.S. about the shortcomings of its financial system as opposed to U.S. officials lecturing about China’s trade practices, currency, product safety and financial regulation, which is how these biannual sessions have tended to go in the past.
There is no high ground for anyone to occupy any more.
A curious turn of phrase from Vice-Premier Wang Qishan during his opening speech at the latest bilateral strategic economic talks with his American counterpart U.S. Treasury Secretary Hank Paulson:
”I hope the United States will take all necessary measures to stabilize its economy and financial markets as soon as possible and to ensure the security of Chinese investments and interests in the United States.” (fuller reports from Xinhua here).
The first half of that is straightforward enough and could have come from any recent meeting of international leaders from the G-7 up. But to what does the second half refer? Investments by state agencies such as China Investment Corp. and state-controlled banks and other enterprises which have been battered by the fall in global equity markets? We noted yesterday that CIC had lost $6 billion on its stakes in two U.S. financial firms, Morgan Stanley and the Blackstone Group.
Or was Wang referring to the 60% of China’s $2 trillion of reserves that are held in dollar assets? A substantial share of those are U.S. Treasury bonds and debt issued by troubled U.S. mortgage lenders Freddie Mac and Fannie Mae, both now effectively under U.S. government control.
It is no secret that some top officials have been worried for a while that the dollar’s decline was eroding the value of those holdings and questioning whether it made sense for China to continue to increase them. Not that the dabbling in equity markets by way of diversification and to juice yields to offset that has necessarily turned out well in the circumstances (see CIC above).
However, with the U.S. having to fund an expensive bailout, and China being one of the primary surplus countries that will have to provide the cash, the internal debate about growing China’s dollar-denominated reserves will continue. China has little choice but to continue to fund America’s deficits if it wants to avoid global recession, but it also wants to avoid throwing good money after bad. One sign of its willingness to get tougher with the U.S. over this is its willingness to let the yuan depreciate against the dollar over recent weeks, a move that helps China’s exporters even though it reverses Beijing’s compliance with the U.S.’s long standing pressure to get the yuan to rise against the dollar and to stop being what its American critics, including President-elect Barack Obama, have called a currency manipulator.
A couple of notes ahead of the U.S.-China chinwag later this week that goes under the rubric of the two countries’ biannual Strategic Economic Dialogue.
The first is that this looks likely to be the last of these meetings for Vice Premier Wu Yi. China’s most powerful woman is due to retire shortly. At 68 she was not reelected to the Central Committee in October. Stepping down from government posts follows as night follows day.
Wu was a proponent of the policy of depoliticizing economic disputes and had been in charge of both the contentious trade talks with the U.S. and with cleaning up the product-safety scandals. She also struck a good working relationship with her U.S. counterpart in these meetings, U.S. Treasury Secretary Hank Paulson.
Paulson, too, could be gone within the year following the 2008 presidential elections in the U.S. Which brings me to the second note: China may be waiting for a change of administration in Washington before doing anything serious about revaluing the yuan, a topic that again is likely to be high on the agenda at this week’s talks.
Nicholas Lardy of Peterson Institute for International Economics raises the point that the Chinese expect the next U.S president to be a Democrat. With the Democrats already controlling a Congress unfriendly to Beijing, Washington is likely to become more hostile to China after the election. So the plan would be to hold back from making an more reforms — or concessions depending on your point of view — and to keep them in Beijing’s back pocket until the tenor of the new regime in Washington is clear.