Did China cause the U.S. recession?
There is a lot of blame to go around for the U.S. recession. Some people are pointing their fingers at China. Bob Moon speaks with Marketplace reporter Scott Tong about why.
A Chinese bank teller counts 100 yuan notes at a bank in Shanghai (Mark Ralston/AFP/Getty Images)
More on International, Asia, America's Financial Crisis
TEXT OF INTERVIEW
BOB MOON: The White House has announced that Hillary Rodham Clinton's first trip as secretary of state will be to Asia -- including, of course, China. America's dealings with the Chinese could be the most important relationship in the global economy.
But the new administration is off to a prickly start. Treasury Secretary Timothy Geithner angered Beijing last month with accusations the country's been tinkering with the value of its currency to boost Chinese businesses. And then there's the grumbling that China even helped cause our financial mess.
Let's look into all this with Marketplace's Scott Tong in our Shanghai bureau. Hey, Scott.
TONG: Hi, Bob.
MOON: So how, supposedly, did the Chinese cause our troubles?
TONG: Well, here is the "blame China" camp. And, obviously, this is the over-simplified version, assuming the U.S. and China are the only two countries on the planet. But it goes something like this:
I'm here in China and I'm selling you a bunch of stuff, right? I'm selling you running shoes. But I undercharge you because I have cheap labor and the government gives me subsidies -- perhaps the currency is undervalued. So, you pay a low, low price and you actually buy more than you otherwise would. And in return you send me a whole bunch of U.S. dollars. Now, what do I do with those U.S. dollars? I send them back to the States. I lend them back to you. Which does a couple of things, right? That's a whole bunch of easy money coming from China, which pushes interest rates down, helps to keep inflation down. And it also encourages you to buy a bigger house. And, boom, there you have a big ingredient in the housing bubble. Fueled, according to this argument, by cheap Chinese credit, cheap Chinese goods.
MOON: Well, that's all well and good, but it doesn't really explain the whole story here, does it? We've got bad regulations, bad bankers, bad decisions . . . So, it's not just all on China's shoulders.
TONG: That's Beijing's argument that, you know, "You people got drunk and you're blaming the bartender? I mean, c'mon." That's what they're saying. And the other point China makes is this has not been a very good relationship for China, either, right? If China keeps staying addicted to exports, that's not necessarily a healthy way for the economy to grow. It means the factories stay in China, belching stuff into the air. So, China's point is it's this co-dependency relationship that neither side really likes that much. And they take offense at this.
MOON: But all this is history right now. We're looking back at that. So why does any of this matter looking ahead?
TONG: Well, what you could have is the finger pointing means tempers flare and then we move down the slippery slope of protectionism and trade wars. I mean, if we take these runnings shoes that you and other Americans buy, if Uncle Sam slaps this trade tariff on it, suddenly the price goes up and that's not really juicing the economy and encouraging consumption, is it?
MOON: And how bad could this get. I mean, China does have skin in the game here.
TONG: Well, that's right. It holds about $1 trillion in U.S. debt. And if it takes too much offense, one scenario is it could start selling off that debt, triggering a crisis in the value of the dollar. Now, on the other hand, if it dumps all its investments, it hurts itself because the value goes down. Also, China isn't the only investor in Treasury bonds in the world. Americans buy Treasury bonds, central banks in other parts of the world buy Treasury bonds. So, China matters, but perhaps not that much. Now, for now, most people don't think we're even moving toward that direction. The top policy makers in Beijing seem to understand that these political dust-ups happen from time to time. And it doesn't seem like they're bound to say or do anything stupid right now. And the Americans are backing away from things that have offended China. So, for now, adult supervision seems to be the tone of the conversation.
MOON: We can hope everybody realizes we're all in the same boat together, huh?
TONG: Right.
MOON: Marketplace's Scott Tong in Shanghai. Thanks for joining us.
TONG: Thanks, Bob.
Comments
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From The Big Apple, NY, 08/06/2009
Reply to S P's post: I agree 100%. Just being a consumer is the weakest hand the US could possibly have, going forward. Wealth is mainly built by creating something, not consuming it. The US (and others, for example UK) are in poor shape right now. Combine these beliefs with Richard Koo's 'Balance Sheet Recession' Theory and something very powerful (sadly very negative) emerges. In a severe recession textbook economics (ie monetary policy) have no value / effect. Zero % interest rates means nothing when consumers dont want to borrow and banks dont want to lend. Western Governments are theoretically bust ... so tax cuts (to stimulate the economy) are something they can't afford. We're in for a at least 20 years of deep economic resession. Sadly, I'm never wrong with my economic predictions.
From Ann Arbor, MI, 02/17/2009
What's causing the "problem" is that China is holding $Trillion in US cash and treasuries. Messrs. Moon and Tong assumed only two countries in the trading world. What China should have been doing is buying foreign made products, from someone, from anyone, to keep those dollars in circulation. (Of course, China has barriars to sale of foreign products, which makes this difficult.) Eventually those dollars would have made their way back to the US. Some of them might even have been used to purchase US made goods. Everyone would have benefited.
Regarding S.P.'s comments, there is a theory in economics that goes something like "everone benefits when each person (actor, country) does what he does best". For example, Tom may be an excellent carpenter and a fair blacksmith, while Joe is a fair carpenter and an excellent blacksmith. Even though each could do his own csrpentry aqnd smithing, Tom should do the carpentry and Joe the smithing. It appears that the U.S. produces the best consumers; the world has, in essence, been paying the U.S. to consume their products for almost fifty years.
From ON, 02/08/2009
"Americans buy Treasury bonds". This is called monetizing the debt which is highly inflationary. So if you suggest that China not buying the T-bond is "China matters, but perhaps not that much." you better think again. The US right now needs more of the world to lend it money than the world needs the US to over-consume world's finite resources. Everybody can consume. A little baby can consume. It is those that have the ability to create and produce wealth like the Asians are in control. Right now US, with its 70% consumption-based economy, is at a big losing hand. This is the beginning of the final downfall of the US empire.
02/06/2009
Mr.Tong and Gene are missing the point, about China's response, what will hurt the US is not selling securities. What would hurt is China slowing down the velocity (in essence reducing the amount purchased) in which they purchase new US debt. For example instead of purchasing $60m in treasuries a day, China purchases $60m in treasuries per week. That will force the treasury to increase the rate of new debt in order to attract new investors. possibly of course..
But there are signs of this reduction in debt purchase right now..
So we will wait to see how Clinton's visit to China is taken/received.
From St. Louis, MO, 02/05/2009
re: China and why the Chinese will be cautious about taking action even if they feel offended: Scott Tong said, "... if [China] dumps all its investments, it hurts itself because the value goes down.". But the more pressing reason for Chinese restraint from a selloff is in the sentence right before: "...too much offense, one scenario is it could start selling off that debt, triggering a crisis in the value of the dollar." But think: If they forced that steep dollar drop in relation to yuan, they would, in effect, do what we haven't been able to cajole them into doing: effectively raising the yuan, and reducing sales to the US. That, more than the fear of an investment loss, will keep them from dumping US debt.
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