Buddy from the East
China watches nervously as the US gets closer to default date
China has been compared to many things stereotypical: “a fiery dragon waking from its long sleep,” “a skyward-reaching bamboo growing towards prosperity,” and “a fortune cookie telling an everlasting fortune.” Okay — maybe I made up the last one. But many economists speculate too often that China’s market is on a meteoric rise. Although this prediction may be true, the recent debt debates blowing across Capitol Hill have presented themselves as a Great Wall for China.
China, our country’s largest foreign debt holder, with U.S. Treasury security holdings of about $1.16 trillion, is watching anxiously as we inch ever closer toward raising the debt ceiling. With $14.3 trillion of federal debt, the U.S. has only until the deadline of August 2 to find a suitable plan. Otherwise, we default, and China has a panic attack. That’s the last thing China wants. NPR reports that “China has been using diplomatic channels to express its concern. It has sent several official demarches urging Washington to abide by its financial commitments.” Indeed, China is showing its stress wrinkles, but it would be the U.S. developing bruises if we were to betray our national interest. Investors would think twice about investing in our nation again.
Our relationship with China is already on a thin thread — ever since we sold military arms to Taiwan last year, met with the Dalai Lama, disagreed with China’s heinous human rights policies, called their weapons-building “non-defensive,” charged them with heavyweight cyber-world hacking, and decried their trade abuses and currency depreciation. Oh, and calling China things like the “fiery dragon” doesn’t help either. So I’m not surprised that China is slightly irritated with us. But this economic default hot potato may just be the straw that breaks the camel’s back.
To us, China is a frenemy. They want to muscle us out as the top superpower, but they need our economy to be running smoothly. A severe economic stagnation for the U.S. means the same for China. Additionally, Beijing has very few options, according to Professor Patrick Chovanec at China’s Tsinghua University. “By and large, [China] is stuck holding Treasuries and, in fact, they’re stuck buying more because it’s embedded in their growth model. There are no markets that are as deep and liquid as the U.S. Treasury market for them to put all their dollars.” China’s market feeds off the U.S.
If you need more evidence, just run into a Disney store in China. The stores there are turned into English-language workshops for kids. Pearson PLC, the learning company, is buying 39 English schools in seven cities for $145 million. Pearsons predicts the language export to be an ever-expanding market.
Despite the rough past, the U.S. is beginning to see the Big Red Panda eye-to-eye. Recently, U.S. Chairman of Joint Chiefs of Staff Mike Mullen met with the People’s Liberation Army General Chin Bingde. They toured each other’s military facilities as a sign of trust. Mullen displayed his Predator drone and a live-fire exercise. Bingde showed his Su-27 jet fighter and a counterterrorism exercise. This playground exchange may seem inconsequential, but it could actually be groundbreaking. Military relations with China may finally gloss over icy tensions, and trust-building may begin.
An exemplar of trust-building is the U.S. engagement of China in talks of their outer space programs. In 2008, a U.S. military missile shot down a disabled U.S. spy satellite, reasoning that it may be a threat to certain regions. This action drew speculation from China. A year later, China hit one of its own antiquated weather satellites with its own missile, and the Pentagon mirrored the speculation right back. Currently, China is developing many defense technologies, including jammers and lasers for their military space sector. If the U.S. is successful in hashing out agreements for space armament, China and the U.S. are off to a great start in mending military ties.
Not much is certain about how our debt dithering will turn out. China will just have to watch from the sidelines. Nonetheless, the precedent has been set — our military ties with China have been renewed. Only time will tell whether this Shangri-La of mutual peace will maintain.
Editor’s note: Due to editorial deadlines, this column includes speculation about the resolution of the Congressional negotiations on the federal debt that were concluded August 2.