Forget Unocal. Real China Risk Is Treasuries: William Pesek Jr.
July 7 (Bloomberg) -- Watching the U.S. Congress miss the big picture in the age of globalization has become a common occurrence. The latest example: Its tantrum over China's push to buy Unocal Corp.
There's no convincing reason to block Cnooc Ltd.'s $18.5 billion bid for the No. 8 U.S. oil company. Sure, there may be some national security issues at the margin. It's also a bit dodgy for China's state-owned banks to subsidize the deal. Yet steps like divestiture can deal with such concerns.
Here's an even bigger problem: The dustup is distracting Congress from the real threat to their nation's economic future -- fiscal irresponsibility. And China's role in enabling that trend should keep politicians up at night.
China isn't hoarding Treasuries conspiratorially. Its $230 billion of U.S. debt holdings aren't the financial Trojan horse some fear -- a way for China to attack the U.S. economy from within. Those holdings have everything to do with maintaining China's 8.3 peg to the dollar.
The upshot is that Asia's No. 2 economy has a disturbing amount of leverage over the U.S. If U.S. politicians want to protect national security, they should be looking at how much their government is becoming indebted to China.
Dumping the Debt?
What if China began dumping U.S. debt? It wouldn't even have to be about politics. Such a move might come if China decided to float its currency or it thought U.S. yields would rise, forcing it to accept losses on dollar holdings.
That might happen if record U.S. budget and current-account deficits send the dollar lower. The budget deficit was a record $412.6 billion in the fiscal year ended Sept. 30, and a current- account deficit is 6.4 percent of the economy.
All this may sound a bit hyperbolic, especially when you consider China may have much to lose by letting the yuan surge or precipitating a massive drop in U.S. bond prices. Yet it's still an option for a nation that may want to flex its muscles in Washington.
The U.S. used to fear Japan, the biggest holder of U.S. debt, in this regard. Japanese officials in the past have made not-so-veiled threats about pulling the plug on U.S. debt. In June 1997, for example, Prime Minister Ryutaro Hashimoto said ``actually, several times in the past, we have been tempted to sell large lots of U.S. Treasuries.''
Risky to Avoid Risk
The inference, which slammed markets, was clear. The prime minister had just come from a Group of Eight summit in Denver that featured considerable U.S. chest thumping about its booming economy. Japan's leader was merely reminding Washington that while it had created a robust, productive and innovative economy, Asia holds the deed.
Whether China or others in Asia would suddenly dump their $1.1 trillion of U.S. Treasury holdings is anyone's guess. Yet it would be a mistake to ignore the risk.
The U.S. likes to claim its profligate ways are a matter of necessity amid weak demand in Europe and Asia. Such arguments ignore how the Bush administration peddled dodgy financial intelligence in order to push through huge tax cuts. This is less about the U.S. borrowing to bail out the global economy than its own fiscal policies.
For better or worse, China and other Asia nations have made it possible for the U.S. to live far beyond its means. This region ships vast amounts of its savings to the West, holding down U.S. bond yields and supporting the dollar.
Congress and Reality
Yet there's a big flaw in U.S. arguments that deficits don't matter: They will matter if Asian central banks helping the U.S. paper over them change their minds. All it would take for the whole arrangement to come undone is for some of them to shift currency reserves into euros or yen.
Granted, that hasn't happened. Those predicting a dollar crash have been humbled by its resilience. Remember, though, that the support of Asia's monetary authorities is what's allowing the U.S. to confound its critics. If Asians reverse course, look out.
It's here where Congress's efforts on Unocal seem so perplexing. Rather than hyperventilating over Chinese companies buying up household-name U.S. ones, Congress should be panicking over fiscal realities.
Why not let China take a trade surplus that totaled $162 billion last year and invest some of those dollars in U.S. companies? For one thing, foreign direct investment in the U.S. has been sluggish since the 2000-2001 recession. For another, such investments are harder to unload quickly than debt.
The Problem
The Unocal brouhaha threatens to do additional damage to relations between the U.S. and China -- two economies that need each other more than they like to admit. And just as on issues like farm subsidies and China's currency policy, the U.S. risks reminding the world it only favors globalization when it's on the winning side of it.
Perhaps what bothers Congress is that a developing nation like China is managing to shake up the world's wealthiest. Just as U.S. officials lost sleep over Japan's rise 20 years ago, they worry about how China may alter the global status quo and exert influence over the U.S.
China will indeed do that, yet not for the reasons some in Congress think. It's not China's ownership of companies that's a problem -- it's the IOUs.
To contact the writer of this column:
William Pesek Jr. in Bangkok, through the Tokyo newsroom at
wpesek@bloomberg.net.
Rogue
