Monday, February 02, 2009


Scariest Headline of the Day

Chinese Cautious on Treasury Notes —headline in the NY Times

The story from Reuters appeared in the Time's World Business section. Here's the complete story—

China’s willingness to continue buying United States Treasury securities in large numbers will depend on its need to protect the value of its foreign investments, the Chinese premier, Wen Jiabao, said Saturday. He also said that a stable yuan is in everyone’s interests.

Whether we will buy more U.S. Treasury bonds, and if so by how much — we should take that decision in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them,” Mr. Wen said.

His enigmatic remarks, made near the end of a visit to Europe, could raise new concerns about China’s commitment to continue purchasing United States government debt.

Why the Reuters reporter found Wen's remarks "enigmatic"—besides that Wen is Chinese and therefore "inscrutable" to Westerners—I cannot say. There is nothing enigmatic about his remarks at all, as you will see.

In early January Keith Bradsher reported

The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.

China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.

This is a political decision,” he said. “This is not purely an investment decision.

The Chinese signaled that they were willing to play nice and continue to buy dollars, which is to say, American debt, thus keeping the interest rate low on that debt—not to mention keeping down the price of Chinese exports.

Then Tim Geithner had to testify in a Senate confirmation hearing and upset the apple cart by appeasing certain Senators—

... a row intensified over Beijing's exchange rate policy after new U.S. Treasury Secretary Timothy Geithner branded China a currency manipulator last week, using a term the previous administration avoided for years.

A Chinese diplomat said Washington had enough evidence to know China does not manipulate its exchange rate.

"I don't think it's fair all of a sudden to change the position of the U.S. government," the diplomat said....

In fact, Geithner's remarks went beyond Geithner's beliefs and implicated Obama. As Jackie Calmes reported over a week ago—

Timothy F. Geithner ... told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.

An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.

It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs.

So this weekend the Chinese head of government (Wen) signaled to the American head of government (Obama) that he'd better watch out—China will not be toyed with. Put more diplomatically, Obama has just had his face slapped.

A former chief economist at the IMF summed up the risk—

I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.

Only an economist could be so glib. Actually, none of us knows how that goes, which is what makes it so scary.

Last summer amidst calls for Bush to boycott the opening of the Peking Olympics and before the banks had officially begun to collapse, Bush said that such a boycott "would be an affront to the Chinese people." Bush didn't care any more about the Chinese people than he did about the American people, but his handlers knew enough to tell him that he'd better get his butt on a plane heading for Peking.

China seems to be the hole in Obama's foreign policy and is certainly a threat to his economic policy. If sustaining the current financial system is Obama's intention—as it appears to be—don't be surprised to hear someday soon that he has boarded Airforce One for a summit in Peking. If he carries along a hat, it will be in his hand.

2/03/08 — 7:02: Rereading this I realize I'm showing my age. Instead of writing "Peking" I should have written the more modern "Beiching." But who ever ate Beiching duck?

Related post
China shakes the dollar market (11/09/07)


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