Secretary of State Hillary Clinton’s trip to Asia showed that the Obama administration’s policy toward China is unlikely to deviate significantly from that of its predecessor: During its tenure post-9/11, the Bush administration gave great deference to China — on North Korea, Taiwan, and proliferation issues — to ensure Beijing’s general assent, if not cooperation, in the war on terror. After the “economic 9/11” of late 2008, the administration seemed to believe China needed further assuaging on two fronts: 1) as an engine of global prosperity, and 2) as “America’s banker,” given Chinese investment in U.S. public debt.
Unfortunately, the Obama administration seems to be off on the same wrong foot, approaching China with fear-tinged romanticism and a belief that the United States can take no action in Asia without first lining up Beijing. But greater U.S. pragmatism on China is needed. The economic crisis is exposing fault lines in Chinese society, and this seems likely to turn the regime’s attention inward. This calls for U.S. policies that are less dependent upon China’s often capricious Communist leadership and instead built on stable, traditional, and reliable partnerships with Japan, South Korea, and Australia. To take just one example, it may become less defensible over time for Washington to presume that Beijing is willing or even able to exert the leadership needed to contain North Korea’s nuclear ambitions.
That doesn’t seem to be where things are headed. Instead, Mrs. Clinton picked up on the Bush/Paulson theme of “China the banker,” all but pleading for the Chinese government to preserve its store of U.S. Treasury bills, and to continue adding to it. She embraced the conventional wisdom that China, for whatever reason, may shed its holdings of U.S. public debt, which are helping to finance U.S. budget deficits. But the belief that a skittish China might suspend or withdraw capital investment in the U.S. is a fantasy. Where else is China to invest its excess dollars, earned from its massive trade surplus with the U.S.? As long as the dollar is the world’s reserve currency, and the Chinese yuan remains essentially non-convertible, what choice but U.S. Treasuries does China have?
This was recently affirmed in a burst of candor by Luo Ping, a director general at the China Banking Regulatory Commission (and undoubtedly an official without much of a future in Beijing). Speaking at a gathering of global risk managers covered by the Financial Times, Luo asked: “Except for U.S. Treasuries, what can you hold? . . . Gold? You don’t hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option.”
Mrs. Clinton also assured the world that the U.S. and China are engines of growth that can pull themselves and everyone else out of the recessionary mud. In fact, China may be an engine, but right now it is idling and it could soon be stuck in reverse.
China’s economy is slowing; about that there is little debate. The only question is, How much? The Chinese government and most external analysts still foresee 2009 growth at 5 percent or more, albeit down from the double-digit rates of the recent past. That view is echoed by business leaders in China. Dow Jones reports that Wang Jianlin, chairman of the Dalian Wanda Group, a commercial real-estate company, said in Davos that “the growth of China’s GDP may slow to around 5 percent to 8 percent from around 11 percent, but it is still expanding very quickly. The financial crisis poses little impact on the real economy in China.” But the Obama administration is well advised to hedge against these rosy scenarios. The reality is difficult to ascertain, given the opacity and possible manipulation of official Chinese economic statistics. Even so, several financial economists have concluded that economic growth slowed to about 1 percent in the fourth quarter of 2008. Merrill Lynch’s Ting Lu told the Associated Press recently that growth is unlikely to improve through the first quarter of 2009.
The widely held belief that China will soon surpass Japan to become the second-largest economy in the world ignores the fact that the Chinese economy is a spinning top that can come crashing down if exports slow or if foreign investment dries up. Both are happening now. According to Chinese government data, the number of new companies set up by U.S. investors fell by 32 percent in the first 11 months of 2008. In November 2008, foreign direct investment was down 36 percent, to a mere $5.3 billion, from the previous November.
The export picture is equally gloomy, down nearly 18 percent in January from the previous January, after successive single-digit declines in November and December 2008. As long as the United States and Europe remain mired in economic stagnation and recession, the prospects for export-led growth in China will be dampened.
The economic slowdown will put stress on Chin