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Beijing's central bank, the People's Bank of China, buys mortgage- backed bonds from both U.S. home-lending agencies, Freddie Mac and Fannie Mae, to the tune of $48.6 million on average every workday. In that way, the central bank lends its vast dollar reserves, a byproduct of China's trade surplus with the United States, to Main Street homeowners. Those funds in turn help sustain the U.S. housing boom and put money into the pockets of American consumers.
With so much of its attention focused on Iraq and Afghanistan, Washington needs China to put pressure on North Korea to scale back its nuclear weapons program. Washington also relies on China, which has its own nuclear arsenal, to resist offers to sell deadly arms to other regimes. And Washington must deter China from military escalation against Taiwan, which China claims as its own territory. Taiwan, which insists on independence, is a traditional ally of the U.S.
If China ever announced that it would stop financing the U.S. deficit -- such a move would be extreme -- U.S. interest rates would rise in response just to maintain buyer interest in the debt that the Chinese had snubbed. Higher interest rates could throw the U.S. back into recession.
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Dec. 28--WASHINGTON, D.C.--When an American buys a house, there's a decent chance the Chinese bankrolled a chunk of the mortgage.
In fact, the People's Republic of China finances more consumer and government spending than any foreign lender other than Japan.
Beijing's central bank, the People's Bank of China, buys mortgage- backed bonds from both U.S. home-lending agencies, Freddie Mac and Fannie Mae, to the tune of $48.6 million on average every workday. In that way, the central bank lends its vast dollar reserves, a byproduct of China's trade surplus with the United States, to Main Street homeowners. Those funds in turn help sustain the U.S. housing boom and put money into the pockets of American consumers.
"China, in other words, not only provides U.S. consumers with cheap, high-quality goods," said Joseph Quinlan, chief market strategist in New York at Banc of America Capital Management, it also lends Americans the money to buy the goods.
China's financial relationship with the United States goes well beyond consumer loans.
China maintains an even higher credit limit with the federal government. China's reserve bank buys some $187 million in U.S. Treasury securities every business day, helping fuel the nation's record federal deficit -- which in turn pays for its military expansion, its welfare programs and the economic recovery.
"We are beholden to them by our Treasuries," said former U.S. Trade Representative Carla Hills. "That worries me."
Clout without lobbyists China relies on U.S. business to do its talking
It also should worry those who want Washington to clamp down on what they see as China's unfair trade practices, Quinlan and other analysts concur. That's because the U.S., as the world's largest debtor nation, cannot afford to cut off a key source of foreign capital, they say. And apart from America's financial debt to China, political and national security reasons restrain the political establishment from imposing any meaningful tariffs, quotas or duties on the Middle Kingdom.
Nevertheless, protectionist calls in Washington are growing more common and louder. Makers of televisions, textiles and furniture demand political shelter from a surge of seductively priced imports from Chinese rivals.
And as freighter loads of washing machines, DVD players and running shoes pour onto U.S. shores, all with everyday low prices, they continue to depress prices across the economy. That deflation adds to the cost pressure on American producers, who -- as a group - - have cut factory jobs for 40 consecutive months.
For those industries feeling squeezed the most, fighting back is tough.
A blue-chip roster of U.S.-based multinational corporations forms the main line of resistance, pressuring lawmakers to widen trade ties, not constrict them. According to the Chinese government, 400 of America's Fortune 500 companies do business in China. Most of them boast lucrative profits.
"The Chinese spend no money on lobbying," said James Sasser, a former U.S. senator from Tennessee who served as ambassador to China from 1995-'99. "Their lobbying is really done by the American business community in Washington. And they don't want legislation that will adversely affect business ties."
Then there are influential figures such as Alan Greenspan, who last month used his authority as chairman of the Federal Reserve to rebuff the protectionists.
"It is imperative that creeping protectionism be thwarted and reversed," he told a conference in Washington sponsored by the free- market Cato Institute.
National security also dictates a non-confrontational tone with the People's Republic.
With so much of its attention focused on Iraq and Afghanistan, Washington needs China to put pressure on North Korea to scale back its nuclear weapons program. Washington also relies on China, which has its own nuclear arsenal, to resist offers to sell deadly arms to other regimes. And Washington must deter China from military escalation against Taiwan, which China claims as its own territory. Taiwan, which insists on independence, is a traditional ally of the U.S.
"Taiwan is the one place that could bring two major superpowers into conflict with each other," said William Vocke, senior adviser to World Affairs Councils of America, which promotes international exchanges and education.
This month, however, President Bush joined Beijing in pressuring Taiwan to drop a referendum that could advance the island's autonomy movement.
Blinking first Bush, like Clinton, changed tack on China policies
Experts say the U.S. policy of wide-open trade with China seems non-negotiable.
"Every president since Nixon, after a year or two of turbulent relationship with China, always reverts back to a relationship of mutual tolerance," Sasser said.
Bill Clinton initially refused to cuddle the "Butchers of Beijing," which is how rights activists labeled Deng Xiaoping and his deputies after the 1989 Tiananmen Square massacre. But Clinton reverted to a "strategic partnership" with the mainland and even cleared the way for its entry into the World Trade Organization, the 146-nation body that sets international trade rules.
Then, George W. Bush ran for office calling China a "strategic competitor," twisting Clinton's phrase into more of a snarl at what his advisers identified as an emerging rival superpower.
Less than three months after Bush took office, a Chinese fighter jet collided in an air duel with a U.S. Navy spy plane as it flew along the southern coast of China. The Chinese pilot died and the Chinese government held the American crew after an emergency landing on the Chinese island of Hainan.
The precarious incident was a foreign-policy turning point for Bush. The Chinese demanded a formal apology for its pilot's death and held the American crew for 11 days. And for more than three months, the Chinese took possession of America's top-of-the-line EP- 3 intelligence-gathering aircraft, which they are believed to have thoroughly inspected.
It was Bush who blinked first. The State Department issued a carefully written apology with the words "sorry" and "regret." Then, a few days later, the American ambassador followed up with a written declaration of "sincere regret."
These days, Bush treats Chinese disputes gingerly, although his cabinet issues tough-sounding rebukes to the Chinese for keeping their exchange rate pegged at a level that boosts exports.
His administration last month used velvet gloves to apply "sanctions" on Chinese textiles -- even though it announced them with blustery language. The actions won't reduce imports but merely force China to negotiate the size of the next annual increase, which must be at least 7.5 percent. The measures apply only to specific import niches: brassieres, corsets, girdles, nightgowns and certain bolts of knit fabric.
Lawmakers seem relieved to settle for symbolic gestures -- like China's just-announced $6 billion spending spree on American cars and aircraft. The figure made a bold headline in the government- controlled China Daily.
But the amount won't prevent another record U.S.-China trade deficit. The bilateral trade gap, which will widen to at least $125 billion this year from $103 billion in 2002, is the widest between any two nations in history.
Nevertheless, Daniel Griswold, an expert on world trade at Cato, notes that total imports from China equal 1 percent of total U.S. economic output. "I see no problem with the fact that Americans spend about one penny of every dollar of our income on goods made by the one-fifth of mankind that lives in China," Griswold said.
"Same bed, different dreams" -- that ancient Chinese proverb circulates in Washington to describe how the U.S. and China use trade policy for widely differing strategic goals.
China pursues its ascendancy as an industrial superpower, not least to feed hundreds of millions of the world's poor, and legitimize China's unelected leaders by tending a national mood of optimism. Beijing's policy-makers want to double and then redouble economic output in the next 20 years. In 50 years, they want to attain the quality of life of a First World nation.
"China's leaders view the United States as a partner of convenience, useful for its capital, technology, know-how and market," says a report by the U.S.-China Security Review Commission, a permanent body created by Congress just before China joined the WTO.
Flashy, prosperous urban China coexists with a poor, massive rural population that struggles with illiteracy, crushing poverty and a fragile banking system.
Unprofitable Mao-era state-run industries, conceived before China opened its enterprises to competition from the outside world, are laying off millions of workers and creating a new class of non-farm jobless migrant. Old steel mills alone shed 1.2 million jobs in the past four years -- even though China remains the world's biggest steel producer, government figures show.
WTO membership, which China achieved in 2001, also means agribusiness giants, subsidized by Western governments and powered with gene-altered crops, will put another generation of Chinese farmers out of work and add to the urgency to create jobs.
There's little left of the worker protections from the discarded Socialist model. China's system of unemployment benefits expired this year.
"Their growth is impressive, but it's not something they can take a breather on," said a U.S. trade diplomat. "It's sort of like a treadmill that they cannot stop running on."
The Chinese economy may be huge and getting bigger, but it is hardly as robust as its 20 years of galloping growth would suggest.
At the extreme end of poverty live an estimated 40 million people in the wenbao class -- without water, shelter or food. "With 1.3 billion people, this is the biggest example of every problem the world has," said David Lampton, professor of China studies in Washington at the Johns Hopkins University's School of Advanced International Studies. Case in point: By some accounts, China faces a day of reckoning on the environmental damage that its breakneck expansion has wrought; even today, the air in downtown Beijing is a brown ether.
And if Beijing's leaders don't produce the jobs, they'll run into serious social unrest. President Hu Jintao, one year in office, routinely expresses worries in his speeches about the widening income gap between the vibrant cities and the mass unemployment in the rural interior.
Corruption in the provinces is said to be commonplace, cheating people out of their pensions and imposing extortionate taxes on farmers. Workers, too, are on their guard. "Legal protection of their rights and interests remains woefully absent," the China Daily conceded last month. Factory and mine accidents killed 11,449 workers in the first nine months of 2003, an increase of 9 percent, according to the national Work Safety Administration.
"I see the hype on China preceding the reality, much like the dot- com boom," said Diane Swonk, chief economist in Chicago at Bank One Corp. "People are putting money into China without thinking about it."
For all its fragilities, nothing yet has slowed this fire- breathing dragon -- not the Asian financial crisis of 1997-'98; not the Internet and technology crash; not synchronous global recession of 2001; and not this year's outbreak of severe acute respiratory syndrome, or SARS.
Nor can the United States afford to have China slow down. Throughout the past downturn, which has ravaged the global economy, China has been the one major nation with stable growth.
"The mega-trend is toward greater and greater integration of the two countries, with all the dislocation and fear that is associated with this," said Robert Kapp, president of The U.S.-China Business Council.
Said Vocke of the World Affairs Councils: "Managing the relationship with China is the key foreign-policy issue for the United States for the next 50 years, at least it was pre-9-11."
Trade remains the foundation for the relationship. And the more that Americans buy China's goods with their dollars, and the more foreign investment flows into the nation, the more dollars flow into the vaults of the People's Bank of China.
If China ever announced that it would stop financing the U.S. deficit -- such a move would be extreme -- U.S. interest rates would rise in response just to maintain buyer interest in the debt that the Chinese had snubbed. Higher interest rates could throw the U.S. back into recession.
"While it is not presently in China's interest to use its very large dollar reserves as an economic weapon against the U.S., this possibility exists," the U.S.-China Security Review Commission report warns.
"The U.S. has the best recovery that money can buy," said the outgoing chief economist of the International Monetary Fund, Kenneth Rogoff, when he retired in September. "It's borrowing a great deal in order to sustain this very high recovery."
"We borrow money from others to buy goods that we cannot afford," Lampton said. "No politician can run for office saying that people should save more and buy less. It's easier to blame others."
Those dollars are managed behind a glittering futuristic facade on Beijing's main boulevard. Standing sentry at the glassy front portal of People's Bank are a pair of elephants -- feng shui symbols of fortune.
Inside the bank, Jiao Jinpu, director of the monetary policy division, argues that America needs China's loans "because the American economy is very important to the world."
Then Jiao cracks a smile and adds: "The U.S. government uses money from China to solve America's economic problems."
Credit: Milwaukee Journal Sentinel
Copyright 2003, Milwaukee Journal Sentinel. Distributed by KnightRidder/Tribune Business News.