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Is the US now more, or less, reliant on China’s government for financing?

by Brad Setser
January 23, 2009

Rarely do nominees — or even Treasury Secretaries — make news in their written response to questions posed by Senators. But Tim Geithner’s comments on China yesterday tcertainly made news. I more or less agree with Dr. Drezner . Geithner essentially restated Obama’s campaign position — and Obama has long been more concerned about China’s pattern of sustained intervention in the currency market than the Bush Administration has been. Manipulation sounds harsh, but it more or less is a different way of stating something that Dr. Bernanke noted a couple of years ago: China’s exchange rate regime has served as a de facto subsidy for China’s exports.

But Geithner also preserved his options. Above all he signaled that the US hopes that China will respond favorably to US calls for it too more to support domestic Chinese demand (China’s current stimulus is — measured correctly — smaller than the US stimulus: Keith Bradsher reports that “China’s stimulus program is likely to add 1 to 3 percent to its economic growth this year, said Dong Tao, a China economist at Credit Suisse. The American program is likely to add close to 3 percent to the United States’ growth, he predicted” ) and to reconsider its peg. Michael Phillips of the Wall Street Journal reports:

Mr. Geithner stressed Mr. Obama’s promise to “use aggressively all diplomatic avenues open to him to seek change in China’s currency practices.”

More interesting, at least to me, is how hard it seems to be to report on the complexities of the US economic and financial relationship with China right now, when so much is changing. China is buying more Treasuries even as the pace of its reserve growth slows. But the increase in China’s demand has been dwarfed by the increase in Treasury issuance.

One point in the Times story was clearly off. The Times, citing Edward Yardeni, claims that China’s trade surplus is shrinking dramatically:

““Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”

Japan’s surplus is shrinking dramatically. But not China’s surplus. Its November surplus set a record, and December’s surplus was only a bit smaller. Imports are falling faster than exports, pushing the surplus up. China is importing less because it is poised to export less. But that isn’t all. As Andrew Batson reports, Chinese domestic demand has slowed. It is importing less for its own account too. And it is paying a lot less for its commodity imports.

The Times also asserts that the United States dependence on China for financing has increased:

“The United States, moreover, is increasingly dependent on China to finance its ballooning deficit. ”

I have long highlighted the risks associated with the United States’ reliance on China’s government for financing. But I am not sure that this dependence is currently increasing.

The US relies on China above all to finance its external deficit. But the trade deficit is falling right now, both absolutely and relative to GDP. One byproduct of the United States’ own slowdown is that it has to borrow less from the rest of the world than in the past. That suggests that the US is now less not more dependent on the rest of the world for financing. That doesn’t necessarily mean that US dependence on China has decreased though: If China is the only country in the world with a big surplus and the US is the only country in the world with a big deficit, the US is arguably more reliant on China than in the past, simply because there are fewer other sources of external financing for the US deficit.

But in one respect that dependence has changed, as the pace of China’s reserve growth has slowed dramatically. Right now, the US in some sense relies more on private Chinese savers and less on China’s government.

Chinese demand for Treasuries (and until recently for Agencies) also has long helped to support those markets. But it isn’t clear — at least to me – that the United States dependence on China has increased recently. Here are the facts, at least as I see them:

1) China has bought — according to the US TIC data — about $150 billion of Treasuries over the last three months of data. Annualized that is $600 billion, a huge sum. That data only runs through November. However, ongoing growth in the Fed’s custodial accounts implies that this basic pattern continued in December (data/ graphs can be found here)
2) The surge in China’s Treasury purchases has come even as China’s reserve growth has slowed. It consequently reflects a reallocation of China’s portfolio towards the safety of the Treasury market more than a surge in Chinese demand for dollars — and it may also reflect a decision by China’s reserve managers to shift funds out of the hands of private fund managers after Lehman (a decision that has had the effect of increasing reported Chinese purchases of US assets).
3) Once the shift in China’s portfolio toward safety ends, the pace of China’s purchases of Treasuries is likely to fall. It is hard to sustain a $600b annual increase in your holdings of Treasuries if your reserves aren’t growing. Hot money outflows will bring China’s savings into the global market, but in a less direct and harder to track way.
4) The Treasury has increased its issuance even faster than China has increased its purchases. The US is consequently selling more Treasuries to everyone, not just to China. The increase in China’s holdings of Treasuries consequently accounts for a significantly smaller share of the net increase in the supply of marketable Treasuries than in the past (Data here)

Does that mean that the US is more or less reliance on China for financing? It isn’t clear. China’s purchases have increased (more reliant) but it is now providing a smaller share of the financing for the US fiscal deficit than in the past (less reliant). One thing though is quite clear but strikes many as counter-intuitive: the large US fiscal deficit in 2009 will need to be financed primarily from domestic sources not from China. Let me put it this way. China currently has — in my judgment — about $900 billion of Treasuries.* That is a truly staggering sum. But China also didn’t buy them all in a year. The US will need to sell more than $900 billion of Treasuries to cover its 2009 budget deficit. And China isn’t going to double its Treasury holdings in 2009 …

Of course, if China decided to reduce its Treasury holdings in 2009, the amount the US would need to place with private buyers would increase. China matters. But it matters in a slightly different way than before. It used to be one central bank buyer among many; now it is the biggest source of central bank demand in a market that no longer relies quite so heavily on central bank demand.

Three final observations:

1) The US needs financing, but China also needs markets for its exports. The “balance of financial terror” is such that China cannot reduce its financing of the US without also reducing the market for its exports. That limits China’s options. My own guess is that China is more constrained than in the past, as it presumably doesn’t want to do anything with its reserves that would add to the global slump in demand for Chinese goods. If hot money outflows subside, China will almost certainly need to continue to add to its reserves. And China’s ability to shift its reserves from dollar to the euro is also constrained by its desire to maintain good relations with its European trading partners. Key eurozone countries wouldn’t appreciate a big euro rally right now induced by a surge in Chinese purchases, especially if China maintained its dollar peg during the process.
2) China’s currency has appreciated significantly in real terms even as the pace of its appreciation against the dollar has slowed. That implies more not less friction between the US and China. China was willing to allow the RMB to go up against the dollar when the dollar was going down against other currencies and other countries were snapping up more Chinese goods. Now that the dollar is going up and Chinese exports are going down, China is reluctant to allow the RMB to appreciate at all against the dollar. But the US naturally cares far more about the RMB’s value against the dollar than its value against other currencies.
3) Even though China’s currency has appreciated significantly in real terms recently, most real exchange rate indices put it only a bit above its levels in 2000. The expansion of China’s current account surplus since then – and the huge increase in China’s exports since then — suggests that the RMB remains fundamentally undervalued. Other Asian countries exports are actually falling faster than China’s exports. But the RMB’s real appreciation clearly came at a less than opportune time. The RMB was weak in real terms when China’s domestic economy was strong, and now it is getting stronger when China’s domestic economy is slowing sharply.

The US — a large deficit country — would benefit in a lot of ways if it could export its way out of trouble. That would also help to bring the world closer to balance. Yet with its own economy slowing sharply, China’s willingness to accept a stronger RMB has likely gone down. Here, US and Chinese interests diverge. Both want to draw on external demand to support their own growth.

Fortunately it is a littler harder to see why China would think that a major fiscal stimulus isn’t in its interests …

*I’ll explain the basis for my estimate in a subsequent post; I believe that most of the Treasuries that the TIC data indicates are held by UK investors were actually onsold to the PBoC.


  • Posted by K T Cat

    As a newbie in much of this, I’ve got a question. I can’t get my head around this: If the Fed can buy infinite amounts of Treasuries by printing money, wouldn’t that prevent the prices of Treasuries from going down once you committed to monetizing the debt?

  • Posted by Cedric Regula

    KT Cut:

    That was Bernanke’s reasoning when he said he was willing to buy long term treasuries. In effect he thinks he can intervene in a massive enough way to keep prices up/yield down.

    But if it were really that easy to create Nirvana, wouldn’t someone have done it already?

    Not that we haven’t tried in 8000 years of human history. Goldbugs are an excellent source for historical stories about how it all went wrong.

  • Posted by Indian Investor

    People who have a great deal of power and influence can do things with good intentions, but they may be compelled to resort to wrong means to achieve those good ends. I’m now much more convinced about my line of reasoning as to how all these historic “Credit Panics” and the like get triggered.
    After several large well established financial institutions filed bankruptcy, counting their losses shows that those losses are very far from realistic.In 2007 5% of all outstanding mortgage loans was in the category of being both ARM and sub prime. 35% of all homes in the united states were owned OUTRIGHT, with no loans on them. This statistic is from the mortgage bankers association.
    This situation, with even a hundred thousand foreclosure notices every quarter, couldn’t have led to a complete meltdown of the US economy.
    It is obvious and clear to me, and I’m speculating here, that a few very large banks and I-Banks were just looted by their principal. A tremendous amount of money was siphoned out, and they were just abandoned to file bankruptcy. When this happened, in the melee, only a few unknowing commoners were able to ask “Where did all the money go?”. These people were ignored,laughed at, and classified as amongst those who don’t know about the complicated world of mathematical finance in which things that don’t stand to common sense can easily happen.
    Many silly macroeconomic explanations of the money never having been there in those companies were spewed out.
    There was actually no second thought, no re statement of the accounts of these firms by any new auditors, or anything like that. Everybody just waited to see what was still left, and what they could get back.
    Now I know that many of the famed economic history accounts can be seen in a clearer light when you allow for the factor that if a very large, well known institution, like the Vienna KreditanStalt during the Great Depression, suddenly folded up, probably the owners just looted and scooted.

  • Posted by assistant

    Geithner should be a little better worded with his remarks regarding “china’s currency manipulation”.

    His message sent shockwaves through China.
    Geithner should not play the Bush-Hardline treasury secretary. When will the United States learn and adjust to the fact that it is slowly being positioned as an equal weight among other players? The United States in 2009, is not the United States of 1999. After reviewing Geithner senate hearings I believe he lacks a diplomatic tone.

    i’m not confident Geither as treasury is good for the United States. I am a bit worried, as are Chinese Officials in regard to the gentlemens tone.

    If Geithner wishes to ignite “global chaos”, he’s surely on track after only a few days.

  • Posted by chart

    sure, Fed can turn Dollar into Zembawe by printing unlimited dollars and use the money to buy up all debt and bailout everyone. the value of debt, asset, or anything will be kept at high and higher value. but dollar value will be decimated. but be careful of Zembawe style reverse split -> to crash any Dollar holders. Wont want to hold any Dollar when that happen.

  • Posted by chart

    When Fed is done with decimate Dollar. Without any trust-worthy currency, any meaningful trade will be impossible, then global economy will collapse with endless pain for everyone. It is extremely foolish for Fed to bailout any unworthy and push endless pain to innocent people that did the right thing and save. USA is doomed.

  • Posted by chart

    Gold is rally to resistance point now. If dollar broke out to upside, then bright future for precious metal holders and endless pain for Dollar or any currency holders. And meaning good production and trade will slow to hault. Then endless pain will be for everyone.

  • Posted by Indian Investor

    Ok, here are some of my thoughts for 2009:

    Q1) What are the chances of the US dollar suddenly collapsing against major world currencies with all the associated risks of a US Govt. default, etc?

    Ans. Absolutely NONE. All the collapse of the US dollar scenarios, and the petrodollar hegemony arguments are just plain baloney.

    Q2) How will the USD fare in terms of exchange rates?

    Ans. The USD will gradually weaken and decline against currencies like the RMB and INR. It’s hard for me to predict the USD/EUR and USD/GBP rates.

    Q3) Is this a good time to buy gold?

    Ans. Yes. But don’t convert everything into gold. Put a good chunk of your holdings in gold. Gold is a better bet than USD and GBP. For the simple reason that you’re going to have a higher supply of these currencies pretty soon.
    In any case the worst that can happen this year to a goldbug is that gold remains wherever it is now.

    Q4) How will the US deficit be financed?

    Ans. Mostly from the private market in the US. There’s likely to be a shortfall, that will be met by Fed monetization of credit.

    Q5) How will the deficits of the UK be financed?

    Ans. See Ans. to Q4 above for a good indication.

  • Posted by Indian Investor

    Q6) What can be said to all the Chinese analysts, China economists, China patriots, etc that are following Brad Setser’s blog?

    Ans. This answer is really important, so I must write in bold, capital letters.


    Source: Reserve Bank of India.

  • Posted by Indian Investor

    Q7) What should the China Communist Party now do to maintain its rule, and make sure that Chinese people are better off.

    Here the list is endless and I’ll list out some immediate steps.

    Step 1) Make a “statue Budget”
    Get all kinds of healthy young workers from everywhere to build statues, starting with Chairman Mao Zedong, down to the last local Comrade Chairman of some small committee.
    Don’t worry about where the money will come from. If there’s no money, borrow, or print. Don’t give anybody any free time to think about things like whether the Communist Party is good, bad or ugly. They should be busy building statues for every dead leader who has ever had his/her name in print.Make them bronze statues, with a big cement and brick pedestal, possibly a nice fountain spewing water 24 hours, with colorful musical fountains, and so on.

    Step 2) More and more free hospitals, and the like.

    Step 3) Dig irrigation channels wherever you think an irrigation can possibly flow. Dig channels into the Western desert.

    Step 4) Thousands of miles of more expressways.

    Step 5) More nuclear power plants. State owned nuclear plants. Don’t end up like India, you’ll waste a lot of time and money inviting Americans to build them for you. India has made a big mistake by giving unneccessary contracts out to American firms to build these nuclear power plants. They could have just order the state owned Thermal Power Corporation to build more reactors like the one that’s already there in Kaiga.If the Americans want to build nuclear power plants for you, tell them to behave. Stop the endless China-battering.

  • Posted by Indian Investor

    What should the People’s Liberation Army do?

    Ans. Build a huge wall of tanks, mountain divisions and infantry troops on the Western Border.

    If possible start building a great electrified fence at the Western border. Don’t ask me exactly why. Pakistan isn’t willing to crack down on it’s terrorists. It’s asking for a Kashmir handover. There are Jihadist militants in Afghanistan, Uzbekistan, Turkmenistan, you name it. These folks are connected with those Uighur Muslims in your Xingjiang Province. You have to act now to stop Xingjiang from becoming another Kashmir. Learn from the other people’s mistakes. It’s the cheapest way to learn.

  • Posted by Indian Investor

    6) Change all the FDI laws, but don’t do it unless you get a good bargain in return from the international community.

    7) Make a list of all places that don’t have proper electricity supply and telecom connectivity. Make sure every far corner of the country is connected through good roads, electricity and telecom lines.

  • Posted by Indian Investor

    Looks already like quite a long list of things to do.

    Finally, do a complete investigation of all “Human Rights Groups”, “Civil Society Movements”, etc. If you find anything that looks like it’s getting a huge amount of funding from some Western country, BAN it immediately. Arrest all the leaders and throw them in undisclosed jails. Don’t take any silly risks with this one. They’re just there to give money, guns, etc to those rebels and topple your silly Communist Party out of its Beijing seat of power. If the international media cribs, threaten to sell all the Treasuries.

  • Posted by john

    @Indian Investor

    passed with flying colors.

    i would dare to predict a range for EUR/USD 1.25 to 1.45(2nd half)

  • Posted by SetserVsIndianInvestor

    Good Gentlemen- i enjoy this blog. I have to admit one of the drivers is the constant feedback of Indian Investor. Surely has a lot of thoughts and gives feedback on almost every comment since his existent to Setser’s Follow the Money.

    It is of my opinion that Indian Investor makes some ‘controversial’ suggestions/comments and I sense alot of opposition to the analysis put forth by Brad regarding various topics.

    I can only imagine a real-time mega showdown of the The All-Mighty Indian Investor vs. Our Western Warrior Brad Setser.

    Certainly one for the Youtube ranks!

  • Posted by bsetser

    assistant —

    china’s problem in some sense is that it is being treated like it has an equal weight rather than like a small country that doesn’t matter. that means, among other things, that its policy choices have global consequences and will be criticized; the old chinese argument that it should be free to pick its exchange rate against the dollar (also setting the dollar’s exchange rate v the rmb) without taking into consideration the united states’ views on the matter will be hard to sustain as china’s size increases.

    I agree with rien. Geithner did what he had to do — Obama campaigned on this remember, esp. in the primaries, and sponsored legislation on this — and he did it early, so china had time to develop its response. And he did it when the dollar was strong, ergo there was little risk of a selloff.

    The bush administration didn’t put a high priority on the rmb/$ (paulson cared more about financial sector liberalizatoin in china) or about rebalancing. I suspect the obama administration will have a different policy.

  • Posted by Indian Investor

    @ PBoC folks tracking Brad Setser.
    Try to understand what Setser is really saying. Setser isn’t talking about American jobs vs Chinese jobs, or any other such silly topics.

    If the RMB/USD is at 5.87, make it , say 5.37. Create a major hype and expectation about future RMB appreciation. Change the FDI laws. The American private bankers are seeing a tremendous opportunity to invest in China. Don’t let this go.

    Your fully country will be full of dollars from the US Fed and Treasury, that have been diverted into the Goldman Sachs type of companies. This is money that the American taxpayers are paying interest on, and it’s being made available to your country’s enterprises. Bankers don’t care about employment levels. They’re interested in return on equity.

    Forget all the silliness of the Communism vs Capitalism arguments. American bankers will work with anybody if they can make good profits. Even people who just openly kill American citizens around the world are great pals of the American bankers.

    the best long term strategy for the China Communist Party is to make a system where a cartel of private American banks and industrialists own and run major parts of China’s economy. In turn make sure the CCP owns and runs the Army, Police, Treasury etc as it does now. Americans will just support any regime that talks friendly with them and lets them make huge profits.

    Remember that the Department of State doesn’t have a democracy policy. What they have is a foreign policy.

  • Posted by Indian Investor

    @ China Patriots:

    China is exporting electronics goods mainly, plus textiles, toys, etc. If the RMB/USD goes to 5.00, or even 4.00, it won’t make the Americans set up their own chip foundries and their own tailoring floors. On the other hand, you can expect a nice trillion dollars in FDI to China’s new enterprises and businesses.

    A Strengthening RMB will be very objectionable to the export lobbies. Have meeting with them, liberalize all the ECB capital controls for them, get them new loans to do business in the local markets. Announce big stimulus packages that help remove the infrastructure roadblocks to Chinese consumption.

    Don’t worry about the Chinese people going bankrupt through excess consumption. That will never happen. They will all start applying for these new jobs and spend a part of what they earn. The recovery may take time, but it will be strongly on its path.

    Deliver a Steinbruck on Geithner, make a speech stating that this is completely an American crisis driven by the Federal Reserve failure to regulate its own banks and citizens. That will really hit Geithner, because he used to the one of the Fed Governors before.

  • Posted by Ying


    How much should rmb be appreciated against dollar?

    How much treasury do you expect Chinese government continue to buy in 2009 to support US economy?

    How big fiscal stimulus package do you expect Chinese government to have to support its economy?

    What are other polices do you expect Chinese government to implement to be a responsible global player?


  • Posted by Indian Investor

    @ Ying

    How much should rmb be appreciated against dollar?
    Ans. Tough for me to know but they can hit the ground running with a good move of .50 with lots of speeches creating a major RMb appreciation expectation.

    How much treasury do you expect Chinese government continue to buy in 2009 to support US economy?
    Ans. As much as the currency intervention needed to maintain above RMB/USD rate. RMB/USD is more important than volume of Treasury buying. There are plenty of banks sitting on Fed credit ready to buy the T-Bonds.

    How big fiscal stimulus package do you expect Chinese government to have to support its economy?
    Ans. Divide Obama’s fiscal stimulus by US GDP. Now multiply by China’s GDP.

    What are other polices do you expect Chinese government to implement to be a responsible global player?
    Ans. Allow FDI freely in most sectors. Anything that isn’t national security sensitive, let the Americans invest if they want to.

    Hope the above answers are useful.


  • Posted by DJC

    Selig Harrison, director of the Asia program at the U.S.-based Center for International Policy, said it was “very ill-advised for the new administration to confront China as if this were 10 years ago and we were in a strong financial position internationally.”

    “We are dependent on Chinese goodwill for our economic survival and viability, and, therefore, it seems to me that this type of posture is very risky,” he said.

  • Posted by chart

    “Anything that isn’t national security sensitive, let the Americans invest if they want to”

    that is just crap. USA is not exactly a fair player too. USA congress block any foreign investment by Dubai and China in the past. This is just crap. Why should China open up market for investment, when USA is so restrict of foreign investment in USA?

  • Posted by Indian Investor

    Why should China open up market for investment, when USA is so restrict of foreign investment in USA?

    Good question. The US Congress blocked investments by CIC, such as for instance the CIC plan to invest in some US port facilities. But it’s important here to think about the objectives of the China Communist Party. US demand for Chinese imports is collapsing already, and is likely to deteriorate further.
    Since 28% of China’s GDP comes from exports to the US, it’s important to avoid mass unemployment in China.
    That can only happen with a huge fiscal stimulus. Apart from the stimulus you have to think about the capital requirements that come up to develop a huge country like China, since currently the large cities are much better developed than the interiors.

    If the CCP is able to maintain its rule, and improve the lot of the Chinese people, its objectives are attained. The inflow of foreign capital should therefore be very welcome in China.

    Now what’s left to think about is the interests of the people who currently run China’s companies and businesses. Here they are free to compete with foreign companies and they are also free to raise more money from foreigners for their businesses. So the new FDI rules have to be made up in such a way that there is opportunity for both Chinese firms and foreign firms to operate in the marketplace and prove their worth to their customers. This policy doesn’t really harm anyone, but it really helps a great deal.

  • Posted by 900

    Geithner stepped right there on the thinnest of ice with his bold “entry comments”.

    Whether his declaration of the strong dollar policy (while playing with ideas of bank nationalization and quantitative easing of the yields at zir) was ill chosen and unfortunate wording for the rise in the yields or an attempt to keep the price of gold put or even both is largely irrelevant as this point.

    Top this with Chinese “manipulators” and then more pound-like dollar policy wish emerges.

    Fact is that within hours he had to mark himself down somewhat on “strong dollar” but not on “manipulators” part. Well on friday the market already dialed his number to take the first (of many to come) test of (his) credibility. Incidently, this test broke some of the technicals. Bravo. Remember that Bernanke tried to do this before (word contoll) and it lasted not even 30 days. Time-frames are getting much much shorter.

    I’d grade that as less then brilliant entry.

  • Posted by bsetser

    indian investor: please debate facts. all purchases of existing chinese firms (greenfield investment is different) are forbidden w/o explicit chinese gov. approval. the us regime is the opposite: everything can be bought subject to CFIUS review (with a few small exceptions). Boeing in theory could be bought. of course in practice it cannot be … b/c of CFIUS.

    moreover, if you read my work carefully you would know that I do not advocate that China lift restrictions on foreign investments/ capital flows. i accept that its capital controls are necessary so long as the rmb is structurally undervalued. i have long argued that instead of focusing on trying to get china to lift its restrictions on us investment, the us should focus on getting it to allow its currency to rise …

  • Posted by bsetser

    Ying asked:


    How much should rmb be appreciated against dollar?

    How much treasury do you expect Chinese government continue to buy in 2009 to support US economy?

    How big fiscal stimulus package do you expect Chinese government to have to support its economy?

    What are other polices do you expect Chinese government to implement to be a responsible global player?”

    My answer to 1) is that it depends on what the dollar is doing against other currencies and what the relevant time frame is. right now the dollar’s rise v other currencies has produced a strong real appreciation in the rmb. if that continues, i would expect china to maintain its dollar peg. if the dollar starts to fall and that brings China’s RER down, i would expect China to allow the rmb to appreciate against the dollar to maintain the real appreciation. Right now i suspect that china is undervalued by between 10 ad 20% in real terms, and i would like to see that corrected over time. China’s RER is only a bit above its 00 levels right now, and china’s economy is WAY more productive. The extent to which that involves an appreciation v the $ depends on what happens to the dollar.

    on 2) my answer to “how many treasuries should china buy to support the us economy” is zero. China’s government doesn’t buy treasuries to support the us economy. That isn’t its job. China’s government’s job is to support china’s economy. It buys treasuries to keep china’s currency from rising as part of its policy of supporting china’s economy through supporting its export sector. If hot money outflows subside, i would expect that the continution of this policy would require ongoing intervention in the market and i would expect china to buy some treasuries as a result, tho less than in 08. but it wouldn’t be doing so to help the US economy.

    3) how big a stimulus. Measured in the same way (i.e. relative to a baseline that includes automatic stabilizers), i would like to see a stimulus that is larger, relative to China’s GDP, than the stimulus in the US (the us stimulus is now estimated at around 3% of 09 GDP, with more in 10). Think of a Chinese fiscal deficit larger than 5% of GDP …

    4) Limiting export subsidies and not dramatically changing the currency composition of its reserves when any major currency is under pressure. That plus offsetting the RMB’s real appreciation due to $ appreciation with a very large stimulus would suffice. I would also like to see China implement a social security and health care system that reduces income insecurity in china, but that is ultimately china’s choice …

    and on 4) resuming agency purchases would help the US and global economy, but i wouldn’t ask for it — as I don’t think the US/ others should ever ask China to buy anything as that creates an implicit expectation that any such securities will be protected from losses.

  • Posted by Indian Investor

    I would strongly advocate that China should remove as many restrictions on FDI as possible. It would be nice to note that Council on Foreign Relations has a special report on the topic of FDI. What the report concludes is that there should be a clear differentiation of sectors that are considered as sensitive from a national security perspective. It recommends that restricting FDI purely from an “economic security” perspective, where it isn’t clear how the national security is threatened by that investment should be eschewed.
    I’m completely in support of the stand taken in that Special Report.

    Brad’s comment:
    all purchases of existing chinese firms (greenfield investment is different) are forbidden w/o explicit chinese gov. approval. the us regime is the opposite: everything can be bought subject to CFIUS review (with a few small exceptions). Boeing in theory could be bought. of course in practice it cannot be … b/c of CFIUS

    I can understand this better if you can elaborate a bit more. Is the distinction that in case of a foreign investment in China, the investor has to first approach the relevant government authority for approval, and then proceed with the investment plan if approved?
    In case of the Us the plan is first negotiated and then put forward to a review by CFIUS, which seems to me more a procedural sequencing difference than an FDI policy difference.

  • Posted by Indian Investor

    Here’s a link to the report and a correction:

    “The Dubai Ports World transaction roiled Congress in spring 2006, with some
    members of Congress expressing outrage that a state-owned entity based in the Middle
    East could own and control port facilities in the United States. CFIUS had previously
    approved the transaction, and more than a dozen congressional hearings were called
    during which administration officials were excoriated for their supposed lack of judgment in sanctioning the deal.”

    So here I need to correct my fact above. It was a Dubai investment in the US port facility that was blocked by Congress, and not a CIC investment. The principle of my argument is that there is a lot of reason for foreign governments to view the US FDI policy as being restrictive. But that shouldn’t stop them from welcoming foreign investment into their own economies, which would help a lot with economic progress there.

  • Posted by Rien Huizer


    Your response to Ying deserves to be calligraphed, and hung next to Mao’s picture on Tienanmen..As an inspiration of course, not a recipe.

  • Posted by Rien Huizer


    I like your comments about China: the current leadership prioritizes production, has the capacity to do so and understands the sources of that capacity.

    As to the Landes quotes (from the Loss of Leadership chapter of Wealth and Poverty of Nations apparently) I doubt they are very relevant here. Attributing rentier characteristics to a China that is busy catching up technologically and institutionally is rather eccentric by itself, no need to illustrate the point by the Anglo-Dutch case history. Apart from the possibility that Landes’ grand narrative may have a few inaccuracies and omissions

    Anyone studying this subject should be aware first that Western Holland from 1570 through say 1710 was a location (not really a country or even nation) with unique features (highly developed wind power, freehold farmers, militarily impregnable, freedom of religion, absence of what the Greeks would have called tyranny) that attracted refugee wealth and technology (huguenots, sephardis, etc) from the troubled larger countries surrounding it. Second, once these countries had developed secure absolutist systems and early nation state structures, and , third, the military core (the Orange court) had moved to London, much of that wealth moved with them (a more secure location) and the the natives were left with an empty “luxury hotel”, as yet insufficient incentives to adopt modern science to replace wind energy and a shrinking market for their established businesses because of rising mercantilism abroad. In addition, the absolutist and largely state religious neighbours loathed the Calvinist republic’s institutions and acting as a useful political rentier (financing wars) was a reasonable survival strategy, in combination with the Anglo-Dutch strategic alliance.

    Where is the relevance for the US-China relationship? The lesson applies to Singapore..

  • Posted by Ying


    Thank you for your reply.10% to 20% exchange rate adjustment probably won’t do too much difference to the existing global trade system.

    For stimulus package, I am not sure if the government is in the seat to spend large sum of money. My view is that the role of the government is to set the rules, not to play the games. There are principals that guide them to set these rules.(For example,equality,efficiency and financial security,labor protection etc.) By simply giving away money (to business sector)is probably not a solution for the long term health of the economy. Every country’s situation is different and it needs to consider carefully the balance of pros and cons for each project. Also the money may not be there. Going into deficit is not a responsible behavior to taxpayers and the future generations.

    For the last two answers, I guess that US has to move quickly to reform its financial system and pull itself out of crisis. People has to eat and sleep everyday. Asia countries including China won’t have the luxury to wait too long for US economy to turn around due to the political pressures at home. Ultimately, they will have to save themselves by lessening their ties with US.

    In general, I would like to see policies that won’t further integrate the two countries together in the future. After all, it is much easier for politicians and business sectors to be accountable to their own people if there is no cross-boarder complexity. The current globalization makes nobody account for anything.

  • Posted by ReformerRay

    A lot about China on this blog. Mostly, I like the approach taken by Twofish. He says the government and the people are just trying to make a better place for themselves and their children. Just like our forefathers did in the U.S. after the Civil War when we went from an agricultural to an industrial society. China moved much faster because they were able to use what the West provided them – technology of how to organize factories (curtsery of Taiwain, long go) plus a market for their products.

    The Economist magazine this week says Asia is where the crisis is hitting hardest. Maybe so. It doesn’t feel that way to people in the U.S. who have had it so good for so long. I would bet that Asia and China will emerge first from this financial collapse. The tremendous dollar reserves will be very useful in keeping bellies full in China – and in providing domestic demand to substitute for foreign demand. Brad will get his wish.