It was a lecture from China that many saw as the latest sign that the fiscal troubles of the United States are spinning out of control. But the bluster of a state news agency chiding Washington to change its ways also hid how worried Beijing is about their linked economies.
After Standard & Poor's downgraded the U.S.'s credit rating, the Xinhua news wire said on Saturday that Beijing, as "the largest creditor of the world's sole superpower," had "every right" to demand that Washington "address its structural debt problems and ensure the safety of China's dollar assets." China holds an estimated $1.5-trillion worth of U.S. government debt.
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," Xinhua opined.
The editorial went on to suggest that a new global reserve currency might be needed to replace the U.S. dollar – cheeky stuff from the autocrats running the world's second-largest economy. Xinhua is seen as reflecting the consensus view of the senior leaders of the ruling Communist Party, and sets a line the rest of the country's media are expected to follow.
The conventional way to read the editorial was something akin to a dealer warning an addict that he might have to cut off supply. Having helped finance the U.S. economic boom by buying up the country's debt as Americans overspent, China is hinting at moving away from U.S. bonds, a shift that some worry could push the U.S. economy closer to the brink of a new recession or worse.
But doing so would be self-destructive for Beijing. Instead of a dealer and an addict, the U.S. and China more resemble two drunks stumbling down a street with arms slung around each other's shoulders. From one crisis to the next, it's unclear if they're holding each other up or on the verge of tripping.
Despite talk that China and its Asian neighbours would "decouple" their economies from the U.S. and the West after the 2008 financial crisis, the U.S. trade deficit with China hit a record $273-billion last year. The last thing the Communist Party wants to see is the U.S. consumer changing its profligate ways; less U.S. spending means fewer Chinese exports, which means factory shutdowns and perhaps even social unrest in the Middle Kingdom.
(The Xinhua editorial waded uninvited into the American domestic political debate by suggesting that the U.S. curb its deficit by chopping military spending and social programs. Raising taxes – which could affect consumption of Chinese goods – was noticeably left out as a possible remedy.)
This would be a difficult moment for China to see any kind of decline in demand for its products. The Communist Party is about to begin a sensitive transition at the very top, with President Hu Jintao and Premier Wen Jiabao set to give way next year to a new Politburo likely led by current Vice-President Xi Jinping. Bureaucrats are already struggling to control stubborn and rising inflation in the cost of food and other basic goods.
China holds and continues to buy so many U.S. dollar assets not because Beijing sees it as a sound investment strategy, but primarily because it props up the value of its currency, the yuan. A cheap yuan has been crucial to China's export-led growth, and the social stability it has created here.
The important note in the Xinhua editorial was not the threat to find another international reserve currency (really, the euro? the yen? the yuan?), but its worried forecast about what might happen if the U.S. credit rating is downgraded again in the future. "The spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all."
In all likelihood, the Xinhua editorial and all its tough talk was aimed as much at a domestic audience – China's policy of holding trillions in U.S. treasuries while letting social problems at home fester has become increasingly unpopular – than the White House or Capitol Hill. The anonymous editorial was followed Sunday by a more sober article in the People's Daily newspaper that was written by respected economist Sun Lijian.
"The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar," Mr. Sun wrote in the Communist Party mouthpiece. "Yet the biggest victims may not be the United States itself, but other countries that have depended on external demand to amass national wealth."
In other words, China.
Mark MacKinnon