If the path forward in America looks uncertain in the wake of the agreement to raise the debt ceiling and the subsequent downgrade of American Treasuries by Standard & Poor’s, the outlook from the Chinese perspective appears equally murky. At least that is the impression one has after listening to the analysis from two scholars at Renmin and Qinghua University on the current affairs program, 今日关注 （Daily Focus) . The program begins with the anchor asking if the moment has arrived when China can say no, by which he means stop financing private and public American spending. The answer, it appears, is not quite yet.
The two professors attribute the reason for this quandary to an integrated American strategy in place since World War II that relies on the position of the dollar as a reserve currency as a means to finance spending, especially the military budget. This system has evolved due to what one professor describes as American 深谋远虑, foresight and the ability to plan far in the future. Interestingly, in his 2010 book 中国梦 (China Dream), Colonel 刘明福 uses this exact same phrase to describe American policymakers throughout the nation’s history. Both professors feel as though China is still stuck in this system and one of them makes the interesting analogy to France and Charles De Gaulle during the 1960s when the French leader railed against the exorbitant privileges the U.S. government maintained thanks to the place of the dollar in the international system. These phrases—foresight, vision and planning—are not usually associated with American foreign policy, at least not recently.
The question, then, shifts to what type of stance China should maintain toward future purchases of U.S. government bonds. Here, it is important to note the sense of urgency when the professor from Renmin asserts that China needs to find an “astute” and “perceptive” strategy going forward (必须找到一个机警的办法).This point is vital. The news from the United States during the past week stressed how America needed to find some solution to long-term debt but here we see if opposite is also true: China is faced with the tough choice about how to handle it current stack of U.S. treasures as well as to what extant they should keep accumulating them. Lost in the deliriousness of the past week is an important point. China, for all its perceived strength, does not automatically benefit from every misstep and mishap in the United States.
What perceptive and astute measures do these two scholars recommend? First, continuing his analogy with French anger with American inflation in the 1960s when De Gaulle believed that the United States would no longer be able to exchange gold for French dollar holdings, the professor from Renmin university suggests that China come together with other nations who have large dollar holdings in order to get the United States to sign an agreement that inflation over a period of years will not exceed a certain level. The fear, as the professor from Qinghua puts it, is that inflation now aligns nicely with American interests. This solution is unlikely for the simple reason that in the current political climate no American president or member of congress will accept the image of another country explicitly binding its monetary and fiscal policy.
The professor from Qinghua University offers a stratagem with a harder edge, asking America to allow greater Chinese investment in the United States outside of treasury bonds. In this case the tacit threat is the following: China will not purchase them in the future if certain conditions are not met. Here he cites the example of the electronics firm Huawei being denied a contract from Sprint to supply infrastructure for 4G networks over national security concerns (Huawei is said to have close ties with the Chinese military). The implication here is that in limiting foreign investment American forces China, and other countries, into buying Treasuries. This example takes an extreme case and represents it as the norm while overlooking an important point: most countries prevent investment in certain areas for national security reasons, including China. This argument also ignores the fact that Huawei has its U.S. headquarters in Plano, Texas (Gov. Rick Perry himself attending the opening). Like the first path, the second does not seem particularly viable.
In fact, the quandary over American debt is also thorny in Japan, the second largest holder of American treasuries. As one trader in Tokyo suggested, the United States could just hand over Hawaii to the Japanese and the debt would be considered paid. A resolution as convenient as it is impossible, something out of the 19th century rather than the 21st! For the moment, it is difficult to forecast if and when the Chinese will stop buying American treasuries, but it is unlikely to be this week.