Commentary: China's clout lies in Treasuries, not takeovers By William Pesek Jr. Bloomberg News
FRIDAY, JULY 8, 2005
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.
There is no convincing reason to block Cnooc'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 state-owned Chinese banks to subsidize the deal. Yet steps like divestiture can deal with such concerns.
The controversy is distracting U.S. legislators 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 is not hoarding Treasuries conspiratorially. Its $230 billion of U.S. debt holdings are not the financial Trojan horse that some fear - a way for China to attack the U.S. economy from within. Those holdings have everything to do with maintaining the yuan's peg to the dollar.
They also give Asia's No. 2 economy a disturbing amount of leverage over the United States. If U.S. politicians want to protect national security, they should be looking at how much their government is becoming indebted to China.
What if China began dumping U.S. debt? Such a move would not have to be about politics. It could come if China decided to float its currency or if it thought U.S. yields would rise, forcing it to accept losses on dollar holdings.
That might happen if record deficits in the U.S. budget and current account send the dollar lower. The budget deficit was at an all-time high of $412.6 billion in the fiscal year that ended Sept. 30, and the current-account deficit is equivalent to 6.4 percent of gross national product.
All this may sound a bit hyperbolic, considering what China might lose by letting the yuan surge or by precipitating a massive drop in U.S. bond prices. Yet these are still options for a nation that may want to flex its muscles in Washington.
The United States 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, Prime Minister Ryutaro Hashimoto said that "actually, several times in the past, we have been tempted to sell large lots of U.S. Treasuries."
The inference, which slammed markets, was clear. The prime minister had just come from a Group of 8 summit meeting in Denver that featured considerable U.S. chest thumping about its booming economy.
The Japanese leader was merely reminding Washington that while it had created a robust, productive and innovative economy, Asia held 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 United States likes to claim that its profligate spending is necessary 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. The issue has to do less with the U.S. borrowing to bail out the global economy than with its own fiscal policies.
China and other Asian nations have made it possible for the United States 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.
As a result, the U.S. argument that deficits don't matter is flawed: They will matter if Asian central banks helping the United States 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 Asian monetary authorities is allowing the United States to confound its critics. If Asians reverse course, look out.
That is what makes the Congressional fixation on Unocal so perplexing. Rather than hyperventilating over the Chinese buying up famous U.S. companies, Congress should be panicking over fiscal risks.
What is the danger in allowing China to 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 United States has been sluggish since the 2000 recession. For another, such investments are harder to unload quickly than debt.
The Unocal brouhaha threatens to do additional damage to relations between the United States 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 United States risks reminding the world that it favors globalization only when it stands to gain.
Perhaps what bothers Congress is that a developing nation like China is managing to shake up the world's wealthiest countries.
Just as U.S. officials lost sleep over Japan's rise a generation ago, they worry about how China may alter the global status quo and exert influence over the United States.
China will indeed do that, yet not for the reasons some in Congress think. It's not Chinese ownership of U.S. companies that is a problem - it's the IOUs.
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