The US needs to recognise China’s vital role in saving it from financial ruin
Brian Moore says the key role China, as a holder of substantial US securities, played to stabilise the global economy should be acknowledged, and such positive conduct encouraged
Within the US political establishment, China is seen as the source of many of the ills in the American economy. Headlines and campaign platforms state that China’s currency manipulation has kept the renminbi artificially low and has devastated American manufacturing; China’s massive holdings of US debt has subjected Americans to the will of Beijing; and Chinese state-owned enterprises are setting their sights on American acquisitions that puts US national security at risk.
While there are elements of truth in this rhetoric, the perhaps more important story of China’s interaction with the global economy is too often glossed over.
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When the global financial system has been at risk of disaster, China has been a key partner, and at times served a critical role that helped pull the system back from the brink.
During the onset of the financial crisis in 2008, the US Treasury estimated that China’s holdings of US securities totalled a tremendous US$1.2 trillion (a symptom of China’s central bank needing to maintain the renminbi’s peg to the dollar and the need to invest its reserves somewhere safe). As the crisis grew more serious, the market was signalling to debt-holders to dump US paper.
A large move out of US government bonds could have sparked a wave of short-selling that would have driven up the cost of US borrowing, and this increase would have hamstrung Washington’s ability to fund the US$800 billion stimulus package that eventually injected liquidity and jump-started the global economy.
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“If they had sold off Treasuries, converting the proceeds to another hard currency or buying up commodities or other real assets, it would have shot US interest rates back up and put downward pressure on the dollar and upward pressure on the renminbi,” economist and former CIA East Asia specialist William Brown said. “This could have been a disaster for us, especially if the move was calibrated to decrease confidence in the dollar.” Instead, China’s holdings of US debt increased throughout the crisis and thereafter, probably to the dismay of hawkish, anti-American factions in China.