04.11.10

China's Reign Ends Tomorrow

As Chinese President Hu Jintao lands in Washington for Obama's nuclear summit, Gordon G. Chang on why the visit proves the superpower is more bluster than bite.

As Chinese President Hu Jintao travels to Washington for Obama's Nuclear Security Summit, Gordon G. Chang on why the visit proves the superpower is more bluster than bite.

Hu Jintao, China’s enigmatic leader, is now in Washington for President Obama’s two-day Nuclear Security Summit. His symbolic presence in the American capital is a climbdown for the Politburo Standing Committee, which not long ago was determined to punish America.

Beijing’s bender started in Copenhagen in December. At the climate-change conference, Wen Jiabao, the usually mild-mannered premier of China, went out of his way to snub Obama as the Chinese delegation torpedoed a global deal on reducing carbon emissions.

“The Chinese, struggling to keep their economy moving forward, are more dependent on us than we are on them.”

Wen’s surprising hostility in Denmark was soon followed by threats over Taiwan—in the form of promised sanctions on American companies selling weapons to the island republic—and Tibet—a warning about causing economic injury to the United States if the Dalai Lama visited the White House. Beijing also issued Cultural Revolution-type rantings over Google’s decision to refuse to continue censoring its Chinese search engine. Premier Wen finished off the Chinese tirade at the annual National People’s Congress meeting last month, criticizing America for a multitude of faults, shortcomings, and mistakes and demanding that Washington rectify its policies.

• Huang Hung: China's Mysterious Leader

To show Chinese anger, Beijing signaled to American diplomats that Hu would not show up at Washington’s nuclear summit. Yet Hu executed an about-face by accepting, at almost the last minute, Obama’s invitation.

Why did he finally decide to come? The most likely explanation is that he saw pressure building in Washington to cite China as a currency manipulator in the Treasury Department’s report due April 15. Beijing’s renminbi is deliberately undervalued to make China’ exports competitive, and this has cost American jobs. Hu knew the Obama administration would not name China if he accepted the invitation to the nuclear summit, scheduled to conclude just two days before Treasury Secretary Timothy Geithner was to issue his list of currency bandits.

At about the same time Hu announced he would show up, Beijing reversed another long-held position and said China would participate in American-led discussions to sanction Iran. China watchers rejoice that Beijing and Washington have patched up relations this month, but the big story is that the Chinese acceded to American pressure.

Although most Americans believe China is the world’s new superpower, the Chinese leadership realizes that’s not the case. Beijing’s top officials also understand that, despite what most people think, China remains especially dependent on the United States.

Last year, for instance, every analyst had predicted that Chinese exporters, concerned about the ailing U.S. economy, would diversify away from the American market. They were dead wrong. In 2009, when China’s total exports fell an astounding 16 percent, exports to our shores dropped just 12.5 percent. Moreover, China’s trade surplus against the U.S.—$226.8 billion—was 115.7 percent of its overall trade surplus. That’s up from an already stunning 90 percent in 2008. In short, the Chinese ran a trade deficit with the rest of the world to build up a surplus against us.

China’s increasing reliance on the American market means that Beijing will not stop buying Washington’s debt anytime soon. It is, of course, theoretically possible for Chinese technocrats to take their dollar earnings from exports to the U.S. and convert them into other currencies, but that would constrain the American economy. If they constrain our economy, theirs will suffer too, undoubtedly more.

For the same reason, the Chinese cannot dump our debt, as a Chinese general suggested in February as a means of punishing us for arms sales to Taiwan. In any event, the tactic, which the Chinese call the “nuclear option,” will not work.

If the Chinese sell our debt, they will still get back dollars. If they are doing this to hurt us, they will exchange their dollars for other currencies. As a practical matter, they will be converting their dollars into euros, pounds, and yen.

Those purchases will send the value of those currencies soaring, which means Brussels, London, and Tokyo will go out into the market to rebalance their currencies, and the only way they can do that is to buy... dollars. The result? Our debt will be held by our friends instead of a potential adversary. If debt is a weapon, then dumping it is unilateral disarmament.

So the Chinese government has bought and will continue to buy our debt. There were reports that Beijing sold $34.2 billion of U.S. Treasury securities in December from publicly tracked accounts, undoubtedly sending us a warning. But at about the same time, the Chinese were buying Treasuries through foreign nominees—that is, secretly. We should of course be concerned about the estimated $1.7 trillion of our government’s debt that China owns, but this holding is not a sword over our heads.

The Chinese, struggling to keep their economy moving forward, are more dependent on us than we are on them. And that means what everyone knows about China—that Beijing holds all the cards—is just a myth. That’s why Hu Jintao is in Washington at this moment.

Gordon G. Chang is a Forbes.com columnist and the author of The Coming Collapse of China.