US and them…our ‘new’ partners

Simon Smelt at Seeking Alpha discusses how the US and China are “communicating” national interests. He points to three important, very broad messages needing interpretation and analysis:

In summary:

1. In 2005 a bilateral Strategic Economic Dialogue (SED) between China and the U.S. was set up. Reportedly, Beijing has put a lot of effort into this and sees the SED as the primary channel for dealing with pressing economic issues. It is the mechanism for dialogue between the G2 on strategic issues, including those of worldwide importance.

What all this boils down to is that China expects to be involved in the big decisions. The message is:

No more U.S. hegemony in the financial world

Lacking a suitable multi-national mechanism (memo from China: “don’t blame us – we’ve been calling for one”), the G2 will do fine instead.

2. The U.S. has long run a trade deficit with China. The U.S. fiscal deficit by the government is more recent. It stems from the Bush years and is about to get much worse due to the various bail-out and stimulus packages. The Chinese can scarcely object to the trade deficit – they have funded it for years. So, the message is: don’t rely on us to buy your extra bond issues caused by your economic mismanagement.

So, the second Chinese “No”:

No extra U.S. bond purchases by China above the normal level

3. No policies that could lead to sharp depreciation of the U.S. $

The danger here is of loose monetary policy pushing inflation sharply higher or other measures undermining confidence in the U.S. $. Debt could be inflated away. I’ve commented before on the dangers for China here. Exaggerating just a bit I said “Imagine, U.S. to China in 2015: “Here’s the trillion we owe you. Buy yourself a beer with it.”

Smelt’s final answer/interpretation:

You’ve been bad but let’s still do business. Here’s our terms.

US response to date, given only public statements and no new trade agreements:

We do know that Treasury Secretary Geithner – quoting President Obama in aid – effectively threatened China. He accused China on Jan. 22 of “manipulating” their currency, the yuan, to give an unfair advantage to its exporters and suggested U.S. action might eventuate.

Geithner’s message appears contradictory because he also spoke of Obama’s concern for a “strong” U.S. $. So, that’s a “strong” $ except for, err, the Chinese Yuan. In fact, this does make sense. The strong dollar remark is perhaps signaling:

Yes, the U.S. government will act to avoid hyper inflation or sharp depreciation of the dollar.

The currency manipulation remark is saying to the Chinese:

You can do your bit too.

(Rdan….no bashing here, but the relationship needs a thorough assessment…I see Angry Bear also addressing the issues in a straight forward way)