Monday, January 05, 2009

China's influence on US fiscal policy

Q. Why does the American government care about China?

A. You don't scream at your banker.

Yesterday I posted about an MSNBC article on America's national debt. It noted:

some analysts are concerned that the deepening global recession will force some of the largest U.S. creditors to divert cash to domestic needs, such as investing in their own banks and economies...

Now read this Dec. 29 Bloomberg piece by By Kevin Hamlin and Mark Drajem:

Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.

“The American economic slump is running into the Chinese economic slump,” says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. “It's creating the conditions for a face-off between Beijing and the U.S. Congress

And for further clarity on who is calling the shots...

McGregor says Obama's China policy will require a balancing act “fundamentally different” from what his predecessors faced: Obama's Treasury will need to fund a budget deficit heading for $1 trillion this year and “you don't scream at your banker.” China's holdings of U.S. Treasury securities, at $653 billion, are the world's largest.

That means an increase in trade tension “is very easy for China to handle,” says Guan Anping, a managing partner of Beijing-based law firm Anjin & Partners and a legal adviser to former Vice Premier Wu Yi until 1993. “China can react by reducing its purchases of U.S. government bonds.”

Back in September, it was reported that China was the straw that broke the camel's back when it came time for the Fannie / Freddie bailout.

Make no mistake... we may not be taking marching orders from China yet, but their influence is far-reaching inside-the-beltway.

Tim White

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