President Obama’s trip to Asia is one part introduction, one part diplomatic dialogue and eight parts competitive economics. Whatever understandings are reached with leaders of Japan, South Korean or the Asia-Pacific Economic Cooperation Conference (APEC) in Singapore, it is the visit to Beijing that matters.
The American President would like China’s cooperation on the Iranian and North Korean nuclear programs, a more flexible currency policy for the yuan, open trade and continued Chinese purchase of American debt. He is likely to obtain only the last, the price for which will be all the others.
China wants unquestioned sovereignty over Tibet, an uncritical acceptance of its internal political and economic policies and reassurance that the United States will honor its debts, rein in deficit spending and prevent a dollar collapse.
The Beijing rulers received assurance on Tibet when Obama refused to see the exiled Tibetan Dali Lama. The frequent American criticism of China's trade policies and human rights issues has become much more muted in the past eleven months. This administration has not, as in previous terms, harangued China to open its political and economic system, Treasury Secretary Geithner’s ‘manipulated yuan’ comment before the Senate Finance Committee notwithstanding.
The trade-off will come between the competitive economic agendas of China and the United States. The terms of this agreement have already been set; the China trip simply makes the new status quo plain for all to see.
President Obama will reassure President Hu that Washington takes its debt obligations seriously, that it is about to become serious about controlling Federal spending and that it holds to a strong dollar policy. President Hu will promise not to withdraw Chinese support from the Treasury market. The Chinese will pretend to believe the Americans and the Americans will not press them on any other topic.
The price for China’s continued support of the US debt market and by extension of the administration’s domestic agenda is American acquiescence in all international topics of importance to China. For the Chinese it is an excellent trade, a chance to neuter its greatest international adversary for the price of an investment it would probably have to make anyway. The basic fact of the trade is that China feels it has choices and the United States fears it does not. As long as Chinese withdrawal from the US debt market is more frightening to Washington than to Beijing China will have the upper hand in this relationship.
The Chinese currency policy does not just affect its trade with the United States. Because the yuan has been essentially fixed against the dollar since last summer it has depreciated against all other currencies as the dollar has fallen. Terms of trade have worsened for Europe, South Korean, Japan, Taiwan and all of China’s trading partners. Asian central banks have had to spend billions of reserves defending the dollar against their own currencies lest the appreciation become detrimental to their economies. Though the recession has been less severe in Asia it has not skipped the region. World trade has had a larger percentage drop than the fall in GDP of any individual national economy; the economies that depend most heavily on exports have suffered the most. It does not help that the currency markets have long participated in the positive speculative view of Asian currencies against the dollar.
China’s position as the chief and most important creditor of the United States gives it an influence in the world economy much greater than its relatively fragile political and economic strength warrants. Only the United States has the economic, political and military weight to challenge the Beijing Government’s economic and trade policies. But U.S. opposition is hamstrung by its need to petition the Chinese for more and more money. Absent the United States as the natural leader of nations demanding better trade policies from Beijing, the Chinese will be able to sustain and extend trade and currency policies that are beneficial to her but far less so to the rest of the world.
Beijing’s understanding of the terms of trade that are best for the Chinese economy is encapsulated by its yuan policy. In the long run a currency program that beggars its neighbors does not do China, its trading partners or the world economy any good. After all someone, someplace has to buy Chinese products. Stable economic development for China, as for all others, depends on a domestic economy that absorbs a large portion of the national production. But, at least for now, China’s rulers have decided that they can obtain a better deal in the global marketplace than would have been possible when the opposition to her trade policies was led by the United States and backed by many of China's trading partners.
President Obama’s visit to Beijing is an acknowledgement of this new status quo in the world economy. China will set the terms of her trade for the world until the United States regains control of its budget.
Joseph Trevisani is the Chief Market Analyst for FX Solutions,LLC
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