Sino-American relations continue an ugly dance

A few days ago I gave my version of Sino-American relations over the past six months. In a nutshell, my belief is that China intends to expand their sphere of military influence using financial warfare.

Six months ago, I assumed this relationship would take several years to evolve.

I was wrong.

Only a few days ago, when there was a scuttle between US and Chinese naval vessels, the relationship had progressed much more quickly than I had anticipated. And now this from the APs Joe McDonald:

China's premier didn't say it in so many words, but the implied warning to Washington was blunt: Don't devalue the dollar through reckless spending.

Premier Wen Jiabao's message is unlikely to be misunderstood at the White House. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds. China already is Washington's biggest foreign creditor, with an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session.

That's right. The Chinese just told us to watch our step. And although the AP doesn't mention the recent naval scuttle, make no mistake - these comments immediately began a conversation among The White House, President Obama's economic team AND the Pentagon.

And here's the reality that must be addressed... America is funding it's naval operations near China with Chinese loans. Is it that far a stretch that China simply tells the US to begin repaying its debts as those debts come due (as early as this year) ?

That's the implicit threat coming from Beijing. But what's the knock-on effect if China demands payment?

1) Perhaps the US keeps those printing presses running 24/7 and inflates the money supply? That'd be just great for the price of consumer goods!

2) Maybe the US refuses to repay the loans? I'm "sure" that wouldn't spook other investors to the point of them redeeming their treasuries.

3) Could the US ask other countries for loans? Sure, but it sure sounds like most of the world is broke because they all invested in America's MBS market. And if we went to another country, at what interest rate would other countries then fund us? Perhaps the rate increases to 5%? 10%? Maybe we could stretch for Mugabe-esque numbers?!

I don't see any of those not-so-unlikely scenarios working out well for mainstream America.

Therein lies the problem. China has us between a rock and a hard place.

The best thing America can do is to begin minding its own business. We don't need to be the world's policeman. We're broke and our years of deficit spending are coming home to roost.

We should let China and Japan deal with their own problems. We simply can't afford to do this.

Tim White

p.s. Wen also offered an unqualified defense Friday of his government's policies in Tibet, ignoring questions about a massive security buildup in the Himalayan region.