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A Bid to Boost U.S.-China Relations

Author: Jayshree Bajoria
August 17, 2011

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U.S. Vice President Joseph Biden arrived in China August 17 on a visit to build relations with China's future leader, Vice President Xi Jinping. Jinping is expected to take over as the chairman of the Chinese Communist Party in 2012 and the presidency in March 2013. Biden's visit marks the first time a senior U.S. official will spend a substantial amount of time with China's president-in-waiting. "We're investing in the future of the U.S.-China relationship," said Tony Blinken, Biden's national security adviser.

With his visit coming on the heels of a U.S. debt ceiling debate that highlighted a political crisis in Washington and led to a downgrade of the U.S. credit rating by Standard and Poor's, Biden is likely to spend much time reassuring the Chinese that the U.S. economy is stable. China, which has the largest holdings of U.S. treasuries at $1.2 trillion, has been critical of U.S. management of its debt (WSJ). But China has limited options (NPR) when it comes to diversifying its foreign-exchange holdings away from U.S. treasuries because few other markets in the world can handle China's massive foreign-exchange purchases. In an interview with China's Caijing magazine, Biden said the fundamentals of the U.S. economy remain strong and expressed the administration's commitment to reduce the deficit and strengthen recovery.

Meanwhile, Chinese state-owned newspapers and officials offered their own prescriptions for the U.S. economic recovery (AP). Bank of China's Chairman Xiao Gang argues against the United States launching a third round of quantitative easing (ChinaDaily), in which the U.S. Federal Reserve would buy assets such as U.S. treasuries to keep rates low and stimulate the economy. Instead, he writes, the United States must restructure its economic model to shift away from over-consumption to greater savings.

But China is equally to blame for contributing to this imbalance in the U.S. economy, say some analysts. "Just as the United States, over-consumes, China chronically under-consumes as an essential element of its long-term, export-led economic growth strategy," writes Clyde Prestowitz, president of the Economic Strategy Institute, on ForeignPolicy.com.

Other experts note that concerns over U.S. debt might push China to finally reshape policies like appreciating its renminbi and stimulating domestic consumption, steps Washington has been urging China to take. While China's commitment to rebalancing is real, this process will move slower than anyone in Washington would like, writes CFR's Adjunct Senior Fellow Evan A. Feigenbaum. Some inside China are calling for diversifying China's investments and suggesting new ideas to wean China off U.S. government debt. One idea that appears to be gaining traction in Beijing, reports Reuters, is to loosen restrictions on Chinese businesses and citizens investing abroad, which would help reduce the build-up of cash inside China.

Some in China have argued that Beijing use its massive holding of U.S. government debt as leverage to pressure the United States not to sell arms to Taiwan (GlobalTimes), the island China considers a renegade province. But CFR's Elizabeth Economy argues just as Washington found it difficult to influence Chinese behavior in the past, Beijing will find that it "can't influence the United States to take any action that the United States does not believe is in its own interests." Shen Dingli of Fudan University writes that retaining U.S. leadership in Asia (China.org) will depend on U.S. innovation: "spending less, saving more, and reducing the debt," and "other countries could help by importing and spending more." For the U.S.-China relationship to prosper, says Economy, both countries will have to do their part, "whether on developing rules of the road for navigating the high seas, ensuring an environment for free and open trade, or working cooperatively to manage challenges such as the growing threat of cyberattacks."

Additional Analysis:

Niall Ferguson, a professor of business administration at Harvard Business School, says the Chinese economy may be facing its own problems (DailyBeast), such as a real-estate bubble and a huge debt-to-GDP ratio if one considered the bank loans that are at 120 percent of GDP.

China analyst Gordon Chang advocates for U.S. arms sales to Taiwan (Forbes) and writes that the Obama administration's decision to hold consultations with Beijing on them "is allowing authoritarian China to run our foreign policy and determine the defense needs of our friends."

CNN's Fareed Zakaria writes that the economic situation between China and the United States is the financial version of mutually assured destruction and China is unlikely to stop buying U.S. treasuries.

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