China keeps on financing US debts – the WTO-column

(later also at their website they try to gather support, but even the US-administration is not supporting their efforts very actively, and economists – the last one was Dr. William Hickey – make fun of their arguments. “Never in world history has a country been asked to REVALUE its currency! Where was the U.S. when Mexico, Bolivia, Argentina, and China before 1990 DEVALUED their currency?”, writes Hickey.

A much more urgent question to answer is why China keeps on buying US dollars, even though that dollar has been losing much of its value, and keeps on its way south for the foreseeable future. The issue has been raised repeatedly in the Chinese media and also American research has pointed out how the US economy is benefiting from its economic relations with China, with the exception of an occasional toy maker.
Because US-company Wal-Mart is squeezing Chinese companies up to the point where they might default, has given the US consumers handsome returns, much higher than the tax break the Bush-administration is using to make the electorate happy.
There have been abundant rumors that China, together with other Asian central banks, was already secretly selling off its US dollar reserves, but apart from South-Korea most of the Asian Banks, including China seem to stick to their stack of American print material, that is fast loosing its value.
When I owe a bank 10,000 US dollar, I have a problem. When I owe the bank a 100 million US dollar, the bank has a problem.
The US is now close to having a debt with the rest of the world that is close to 30 percent of its GDP. But China keeps on supporting this sliding economy by maintaining its peg between the US dollar and the Renminbi. Countries that do not maintain such a peg, like those in Southern Africa, pay a high price. Letting the US dollar slide might indeed make China more expensive for the US market. China is paying the price, because if it would not, its millions of migrants might lose their jobs just like workers in Southern Africa.

So, the US is – apart from a small group of angry manufacturers – in a comfortable position, as China cannot afford to withdraw its support to the US economy, writes also Harvard history professor Niall Ferguson in a comparison of an indebted Britain in 1945 and the USA today in the New York Times. “Meanwhile, the United States may be discovering what the British found in their imperial heyday. If you are a truly powerful empire, you can borrow a lot of money at surprisingly reasonable rates…. It is only when your power wanes – as the British learned after 1945 – that owing a fortune in your own currency becomes a real problem. As opposed, that is, to someone else’s problem.”

An economic dilemma with profound political implications. Indirectly China has to finance the war in Iraq and the US social security system, and there seems very little political clout it gets out of its reservers.

Fons Tuinstra