China Watch

In the next decade or two, this panda could be calling the shots in your congressional district. Think he'll be interested in expanding Medicare?


“There, is a sleeping giant. Let him sleep! If he awakes, he will shake the world.”

- Napoleon Bonaparte (Napoleon I, Emperor of France) pointing to China on a world map, presumably in the late 18th or early 19th century.

China Watch is brought to you by the belief that the Chinese stand to gain the most out of the global economic recession/depression, and the United States’ subsequent response to the financial crisis and sinking economy.

When I think “sleeping giant”, Michigan football comes to mind, or Indiana basketball (toss in Notre Dame football and the Midwest seems to have a disturbing pattern on their hands). As it pertains to China, a designation of Sleeping Dragon or Crouching Tiger are probably better choices. Either way, Napoleon was onto something a couple hundred years ago.

Although China began to back off of communism in the late 1970s, market liberalization and an embrace of authoritarian capitalism have gone into overdrive since the march on Tienanmen Square on June 4, 1989. Their meteoric rise economically has been nothing short of astounding. They are poised to pass Japan as the world’s second-largest economy in terms of GDP in 2010. Since Tiananmen Square, China has put a man on the moon, opened their first stock market, and jettisoned isolationism by joining the World Trade Organization (WTO) in 2001 and hosting the Summer Olympics in 2008. Lately, China’s financiers have experimented with floating their currency in Hong Kong, a part of their quest to join New York and London as financial centers of the world (and turn the yuan into a viable, top currency). (1)

A British Treasury note, part of the Marshall Aid plan for Britain to finance WWII spending.

The United States’ ascension as the predominant world power was not a sprint. America inched their way into that position, a key moment being when they financed Britain’s war spending in 1945. The Brits were facing bankruptcy after the Second World War, and needed money to help secure a peaceful postwar period. After an original loan of $4.34 billion in 1945, the United States became the Mother Country’s creditor. Britain was supposed to repay the loan in fifty years with annual payments, beginning in 1950. The loan wasn’t repaid until 2006. Debt strapped and economically unable to compete with the United States capitalist system, Britain’s reign as a global political power was over. (2)

Does this scenario sound familiar? When it comes to the China/US dynamics, US fiscal policy looks far worse then Britain’s ever did. On top of financing military expenditures of $1.87 billion/day, the United States is over-leveraged at every level of society: the consumer, local city and county governments, state governments, and the federal government. (3)

The fairly obvious problem with referring to China as a Sleeping Dragon is that they are wide awake; wired really, as if they’re downing 5-Hour Energy’s by the Costco pallet. That part of it wouldn’t be half bad. Avoiding that 2:30 feeling means consuming American-made products, which in turn, would start chinking away at that disturbing trade deficit that stands roughly at $18.3 billion. (4) But I think tea is a more common remedy in their culture. Nevertheless, economic powers become political juggernauts. Political juggernauts sustain control by remaining economic powers. In a short period of time, China is both. Only our authoritarian capitalist friends to the East have no time to quibble over human rights. Whether it’s child labor, human right abuses in Tibet, or dangerous materials used in their production processes (little Timmy playing with lead toys), China has not had the ability to regulate its expanding economy in even a basic manner; or more probably, the desire.

While the world has fought off recession or depression since the financial collapse in 2008, China’s GDP grew at a measly 8.7% in 2009. Shocking, it’s easier to expand when your economic mix doesn’t rely on 70% consumption. They hold $894.8 billion of outstanding US Treasurys and a great deal of dollar reserves. (5) China has proven to be buyers when virtually everyone else in the world are sellers.

They’ve also made it clear they intend to play by their own rules. Whether it’s Treasury Secretary Timothy Geithner or US Ambassador Jon Huntsman, Team Obama’s overtures to China to let the yuan float have fallen on deaf ears. China will not stand for accusations of being a currency manipulator or the Obama Administration imposing trade sanctions, which might be one of the worst ideas I’ve heard in some time given the debtor/creditor relationship we’ve struck up with the Fire Breathing Dragon (sounds much more appropriate). Said China’s Commerce Minister Chen Dening, “The currency is a sovereign issue and should not be an issue to be discussed between two countries.” In other words, in the immortal words of Eric Cartman: “I’ll do what I want!” And you can’t blame China for that. They have put themselves in a position of economic power, which comes with choices and options. They will allow their currency to appreciate when they feel it is advantageous and appropriate for them. China’s Premier, Wen Jiabao, has been quoted over and over again saying he doesn’t feel the yuan is undervalued. The United States on the other hand, has pretty well backed themselves into their over-leveraged, weak, consumption-driven corner, with a currency whose ultimate fate is probably in the hands of central banks around the world.

And if China’s stout economy and brazen attitude towards other countries that have effectively ran their own economy into the ground wasn’t enough, they may be taking the lead in clean energy development, too. Clean energy development has been long touted by the green revolution as the US’ road back to the moral high ground, and an economic light at the end of the tunnel. The leader of this industry will make giant economic leaps selling the new technology to the rest of the world. China seems to be the leader in the clubhouse in clean energy investment. Last year they committed more funds to that end than any major country. $34.6 billion to be exact. The US’ investment in clean energy was down 40% compared to 2008, coming in at $18.6 billion. (6) Not surprising given the economic climate, but it seems China will have the funds to invest more into green energy for some time to come. They’ve also embarrassed the US, by comparison, with their investment in modern infrastructure. Oh how ironic it will be if the country America has banged on like a drum for polluting ends up making the lion’s share of the money from solar, wind, or other renewables.

Hardly an awe-inspiring vision. Americans can't even get high speed rail investment from the northwest to California, the eighth largest economy in the world.

For the US, this nightmare isn’t going away. Spending (and borrowing) more money, preventing overinflated markets from resetting, or following Tiger Woods’ lead back to daily Buddhist meditations, will not wipe the slate clean. Britain woke up one morning and realized it was no longer the world’s preeminent power, but rather, its creditor was. This was an economic transition over time. The US is headed down that path. Leadership appears to believe America still has leverage over China. It is time to wake up. China doesn’t have to lend the US money anymore. They don’t have to let the yuan inflate. They don’t have to offer an explanation to America regarding their environmental practices. Frankly, there may come a time when China elects to liquidate much of their US Treasurys, creating a run on the dollar, and simply chalk it up as an economic loss for political gain. Plentiful are the options for an economic power.

The American people still have the ability to turn the US economy around, if only they were given a legitimate chance by their government. Unfortunately, painful decisions have to be made, and tough times endured to climb out of the hole America has dug for itself. Otherwise, the US will continue to live in an unsustainable, phony economy that will not stand the test of time to the machine China has created. It is time for US leadership to fear the Fire Breathing Dragon, respect it, and do what is necessary to compete with it. Ironically, this would be simply returning to the cultural and economic principles that made America great to begin with: notably innovation, production, entrepreneurship, economic freedom, and thrift. Not borrowing, spending (mostly products made abroad), and pushing the financial services industry. Between political corruption, unions and decades of government intervention, a vast number of layers must be peeled back. The process would be painful and ugly; but oh so worth it.

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(1) Preparing China’s yuan for the world stage – CNNMoney.com, retrieved March 15th, 2010, http://money.cnn.com/2009/11/16/news/international/china_yuan_currency.fortune/index.htm?section=magazines_fortuneintl

(2) Britain Pays off Final Installment of US Loan – After 61 Years – Independent.co.uk, retrieved March 17th, 2010, http://www.independent.co.uk/news/business/news/britain-pays-off-final-instalment-of-us-loan–after-61-years-430118.html

(3) Historical Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/Historicals/

(4) U.S. International Trade in Goods and Services Highlights – Census.gov, retrieved March 10th, 2010, http://www.census.gov/indicator/www/ustrade.html

(5) Major Foreign Holders of Treasury Securities – UStreas.gov, retrieved March 11th, 2010, http://www.ustreas.gov/tic/mfh.txt

(6) Who’s Winning The Clean Energy Race? – Yale.edu, retrieved April 5th, 2010, http://e360.yale.edu/images/digest/pew-clean-energy-investment.pdf

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