CHINA: FRIEND OR FOE?

I began covering China in 1972–the year President Nixon made history by flying to Beijing to meet with China’s aging Communist dictator Mao Zedong. That trip established diplomatic relations between the U.S. and China and eventually opened China’s heretofore closed markets to international commerce.

In the interest of full disclosure I must say I did not accompany Nixon on his historic trip to China. I covered the event from Chicago’s China Town. Sigh. At the time I had only been at the Chicago Tribune for about two years–hardly enough time to win the confidence of editors for such a major foreign assignment.

Then, in 1974, I was posted to Tokyo as the Tribune’s Far Eastern Correspondent. China and its new relationship with its nervous Asian neighbors became an ongoing story. A lot has happened since the early 1970s when China was little more than an emerging Third World backwater.

In the late 1970s, after years of state control of all productive assets, the Chinese government inaugurated economic reform. It encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, relaxed state control over some prices, and invested in industrial production and the education of its workforce. By nearly all accounts, the strategy has worked spectacularly.

China today is an economic powerhouse–overtaking Japan as Asia’s top economy and second in the world behind the United States. It is also the world’s fastest growing economy–averaging annual growth rates of almost 10% for the past 30 years.
And that brings me to the current state of the U.S.-China political and economic relationship.

That relationship is, to put it mildly, stressed–even more than it was in June 1989 when the Chinese government killed some 2,000 to 3,000 of its own citizens during the Tiananmen Square massacre–a story in China I did cover.

Since the Tiananmen Square massacre the human rights issue in China has largely faded into obscurity. The story today has become the love/hate relationship that has developed between the world’s largest remaining communist country and the world’s largest capitalist nation–as well as all of the money that is being raked in, particularly by China. Human rights issues often evaporate when there is money to be made.

The problem today is that Washington’s careless and unbridled spending spree has put all of those profits in jeopardy and China is not at all pleased.

That was evident this past Tuesday when the Chinese dictatorship attacked the U.S. government for endangering its massive dollar holdings, calling for America to rein in its out-of-control debt by slashing military spending and welfare. The regime also demanded international supervision of the dollar and even suggested the creation of a new global reserve currency.

The attack came in the form of an editorial from Xinhua News Agency, one of the dictatorship’s official propaganda arms, following the downgrade of American debt last week by Standard & Poor’s.

China is Washington’s largest single creditor, with more $1 trillion in treasuries as well as more than $1 trillion in other dollar-denominated assets. The U.S. government is officially above $14 trillion in debt, but the real figure including unfunded liabilities is estimated in the tens of trillions — possibly even hundreds of trillions. State and local governments are facing hundreds of trillions in debts and unfunded liabilities, too.

The Chinese regime’s editorial touted the fact that its own credit-rating agency, Dagong Global, downgraded U.S. Treasuries well before S&P. It also lambasted Western commentators for their “arrogant response” when the Chinese agency announced the downgrade, saying the move by S&P had proven that it was simply telling investors “the ugly truth.”

Dagong boss Guan Jianzhong took the opportunity to go on the attack as well. In e-mailed comments, he said the dollar was being “gradually discarded by the world” and that the “process will be irreversible.”

You can almost hear the Chinese rubbing their hands together in glee at this prospect.

Although China may dislike the U.S. fiscal stance, the country, as a long-term investor in and a trading partner, needs a strong American economy.

“The US government has to come to terms with the painful fact that the good old days when it could borrow its way out of messes of its own making are finally gone,” said the Xinhua editorial.

The response from Washington? Deathly silence. While there has been strident criticism of China from US politicians who have argued that Beijing keeps its currency at an artificially low level to help its exporters, China’s harsh criticism of the Obama administration and what it sees as “out of control” Washington spending has left many U.S. officials at a loss for words.

America’s biggest trade deficit is with China. Last year it reached $273 billion, the biggest deficit with a single country in US history. In 2010, the US bought goods from China worth almost four times as much as its exports to the world’s most populous nation.

It is little wonder that the International Monetary Fund recently predicted that China’s economy would surpass America’s by 2016. Despite all of the Chinese regime’s boasting and lecturing, however, countless economists believe that its economy will soon experience a spectacular crash of its own.

I am reminded that in the 1980s, when I was covering Japan for the Tribune, there were similar predictions being made about Japan. “Japan as #1” was a huge best seller and the premise was that the U.S. was finished as the world’s leading economy. We all know what happened to Japan in the early 1990s when its fragile economic bubble burst.

The difference, of course, is that Japan had no ambitions of becoming a global political/military superpower, whereas China does.

I am not convinced that the government in Beijing is any different than the one in power in 1989 that ordered the army to mow down democracy protestors in Tiananmen Square. Nor am I convinced that China is America’s friend.

In fact, I believe if China could figure out a way to bring down the U.S. economy without losing trillions of its own dollars that are currently tied up in U.S. debt and treasury bills, it would do it in a heartbeat.

One can only hope that U.S. officials are smart enough to understand that. But given the Obama administration’s dismal failure at managing our economy as well as international relations, I am not holding my breath.

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