Despite last week being Wall Street’s best so far in this still-new year, China signaled its anxiety about its $1 Trillion-dollar investment in US Treasury bonds and perhaps opened a new chapter in Sino-American relations. Last year, China passed Japan to become the largest holder of US Treasuries.
No less a personage than China’s Premier, Wen Jinbao, at the National People’s Congress in Beijing at the end of last week, made statements which were instantly picked up worldwide by the ever-hungry Media and that are now being studied the way the former Fed Chief Alan Greenspan’s comments used to be scrutinized every which way to find tea leaf readings and other cryptic messages.
Premier Jinbao said: “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets," Wen said. "To be honest, I am definitely a little worried." Those last few words are being parsed and held up to the light to show all facets to indicate what the Chinese will do and say next about the worldwide economic crisis and its effect on how we all continue to do business. It is being reported that Premier Jinbao also asked for (or “demanded,” depending on whose account you read) the Obama administration to "guarantee the safety" of its $1 trillion invested in US Bonds, while America takes on a whole lot more debt in an effort to jump-start, re-boot, and wake up our slumbering, nearly comatose economy.
I wouldn’t get as excited as many Media wags are now doing about last week’s Wall Street comeback – we are still at something like 50% of where the Dow was a year ago and Bear Market Rallies are a well-known phenomenon which has occurred over decades, well past our sound-bite memories of history. The fact that Citi, B of A, even GM, and other financial and corporate giants have signaled something other than total calamity as they look over their books for the first couple of months of this year is more a function of the massive infusion of Federal BailOut money than any real indicator that we can all rely on yet. Now, don’t get me wrong, I would like to see my 401k rise up from its current 101k status, perhaps back to 201k or even 301k levels, as much as the next person, but economic crises like this one do not suddenly resolve in a week the way TV shows wrap it all up in a half-hour or an hour, with commercials. But, this latest from China is, shall we say, interesting.
We had a good, symbiotic thing going through much of this decade with China: we bought oodles of their manufactured goods, cheap, and they bought our Treasury paper with the money we paid for their goods – gobs of it. The US Dollar has ruled the world, in good times and bad, since we went off the Gold Standard under FDR back in the 30’s. To even pose the question of whether the US would or could ever default on its Treasury obligations, the very engine of our whole way of life, would have been greeted with calls of absurdity, even as recently as last Summer – not going to happen; simply not possible; unthinkable.
Now, few really believe that China’s Premier’s statements mean that China is about to stop buying US treasury paper – we are still the only ‘game in town’ in the sense of stability and reliability, solidly grounded in our legal and corporate and financial systems which are both sufficiently transparent and accountable by real rules and not a function of who you know, or are related to, or pay off with bribes. But, this is surely something new – for our largest creditor nation to be acting like one of our threatened banks and, in effect, be asking for more security, either psychological or in some other way, for their massive $1 Trillion investment; this has not happened before. Nobody thinks that US treasury paper is going the way of the old Russian Railroad bonds issued in the teens and twenties of the last century which are now suitable for framing and wall hanging, but are otherwise worthless.
But, what if China were to ‘up the ante’ and threaten to stop buying or to buy less or to only continue to buy with a few ‘ups and extras’ thrown in to make them sleep better at night? China now has serious leverage – any change in their buying habits of our Treasury paper will change the US economy drastically, likely shoot up our interest rates, and make getting a mortgage for Americans even harder.
It is nearly unprecedented in US history to have a massive nation, well-armed militarily, and with a population many times our size, not only be our rival for influence in Asia, but also be, at the same time, our largest creditor. You would have to go back to France in the late 18th and early 19th Century to come even close to a similar situation and there is nothing in the modern world to provide any roadmap for what comes next. And, then there’s China’s continued Communist system, which has strangely morphed into Capitalism in a big way. It is also noteworthy that recently China’s GDP was more than half that of the US, and its auto sales and shipbuilding industry also surpassed the US. There was also that little dust-up recently where five Chinese ships confronted a U.S. military ship in international waters – just to make a point, apparently.
This all augers for more intense China-watching coming up in the near future as China continues to rattle its economic saber and flex its muscles, perhaps testing the new Obama Administration, but definitely signaling that there are yet even more implications, and even Blowback, to ponder as we continue to cope with our current economic situation.