After The Fall Is Over
Monday, May 18, 2009
When the global economy began its free-fall in September, China was among the countries most stunned by the crisis. Since its economic awakening in the early 1980s, Beijing increasingly had embraced the U.S. economic model. China had prospered by exporting to America. The United States paid by borrowing from China. Suddenly, it all collapsed.
Since then, China has been going through the same sort of turmoil that other countries have been experiencing. Its exports have fallen sharply. Its trade surplus has started to shrink. Its economy has slowed by more than half from its mid-2008 pace, and more than 20 million workers in export industries are out of jobs. Social unrest is on the rise.
Beyond that, the picture is confused. Read the headlines, and you'll find that over the past few months, China has been combating a wave of capital outflows (true); binge-buying gold, copper and other metals (true); paring its purchases of U.S. treasury bonds (maybe); losing foreign exchange reserves (maybe), and starting to recover (possibly).
There's no real consensus on which of these developments will prove to be lasting trends. Brad Setser, a Council on Foreign Relations economist who keeps close tabs on China's economy, says it's too early to tell what's really going on. Much of the latest data available in China are from February.
But some analysts seem convinced that once the recession has ended, the basic foundation for the U.S.-China economic relationship might change, with China less dependent on exports and Americans bent on saving more and spending less. How the broader U.S.-China relationship will look remains to be seen.
"The expectation that China will enjoy a continuing global trade surplus indefinitely is history," says Harald B. Malmgren, a former top U.S. trade official who follows U.S.-Chinese developments closely. "And if the Chinese don't have as large a surplus, they're not going to be buying as much in U.S. Treasury bonds."
Indeed, China might not remain quite the worldwide assembly plant that it has been in previous years. Wages there, while still relatively low, clearly are rising. And quality-control is weak. Some U.S. and other multinationals already have begun looking toward Vietnam and other less-advanced countries as replacements.
Such developments don't necessarily mean the United States will have difficulty borrowing abroad from now on. China doesn't want to see the dollar and Treasury offerings plunge, lest that diminish the value of its substantial holdings. Other governments and private investors most likely will fill the gap if China pulls back.
But Malmgren believes that the change in the basic economic interdependency will leave future Sino-American relations influenced more by global geopolitics and security issues than by economic issues. China is extending its diplomatic reach, expanding its oceangoing naval force and taking a more visible role in worldwide policymaking.
"It's going to be a much more intricate, complex relationship," Malmgren says.
To many analysts, China's economic policymakers have accepted the reality that the country won't be able to export its way out of this crisis, and have begun moving to spur demand at home. The government's new stimulus package is designed to boost domestic borrowing and finance new infrastructure projects to help create jobs.
So far, China also has avoided the temptation to make its exports more competitive by allowing the yuan to depreciate. It has, by and large, avoided any major protectionist measures. And despite China's suggestion earlier this year that the dollar has outlived its usefulness as a reserve currency, Beijing is unlikely to dump dollars anytime soon.
But China's authoritarian government is leery about the social unrest that is fomenting, and is still flailing around trying to find a way to deal with it. And China's politicians are having the same debates as the U.S. Congress over where to put the stimulus money.
Most important for the United States, to some analysts, is that China's top leaders appear to have lost confidence in the American model, making them more leery about continuing to adhere to it as doggedly, and more wary about taking Washington's advice -- a worrisome prospect if the debate in Beijing intensifies and turns into an internal power-struggle.
"My sense is that the Chinese government is very uneasy about the ability of the American government to solve this crisis quickly and easily," Malmgren says. "They see our day-by-day debate about what should be done to resuscitate the economy, and they're very concerned about whether we know what we're doing."
The challenge for the United States in coming years will be to regain China's confidence, nurture Washington's relationship with Beijing, and encourage China to become a major player in spurring global demand. Eventually, what America and China do together might become more important than the G-7 or G-20 forums in managing the global economy.
As economist Setser says, the old U.S.-China relationship -- where Americans wolfed down Chinese exports and China financed the U.S. spending spree by buying up Treasury securities -- might have been convenient, "but it never was a good fit. It was a dangerous combination." Adjusting to a new model won't be easy for either side.
by Art Pine