Much of the world is betting on the success of China’s own stimulus spending program, which equals nearly $600 billion. However, despite the impressive aggregate size of the Chinese economy, per capita income still ranks very low, standing at 107 out of 179 nations, or about $2,000. The capacity of the economy to compensate for demand destruction in its principal export markets through comparable increases in domestic consumption does not appear to be suffcient enough to create a basis to hang the global economy on. What is more likely is that China will spend what it can, borrowing from its sovereign wealth funds and reserves, to inhibit the growth of unemployment so as to maintain social cohesion.
As for Geithner’s agenda, his number one priority remains China continuing in its role as America’s principal banker. Like large debtors everywhere, the U.S. Treasury Secretary and Obama administration actually believe they have China over a barrel. The U.S. was just a larger version of AIG or Citigroup in their framework; too big to fail, as China’s major export market. For a time, it appeared that China’s political and economic leadership reluctantly agreed. Recall the words of Luo Ping, a director-general at the China Banking Regulatory Commission, who told journalists back in February that, “Except for U.S. Treasuries, what can you hold? U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of Treasury bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”
Now, however, there are growing indications that a major reassessment is underway among China’s principal economic policymakers regarding their country’s huge investment in U.S. government debt, currently in the range of $1 trillion. A growing number of Chinese officials are on record as believing that the U.S. dollar will eventually lose its role as the world reserve currency. And while in the short-term China will continue to purchase U.S. Treasuries, its own domestic needs and financial limitations are likely to restrict those investments to a level that represents only a fraction of the vastly exploding U.S. government borrowing requirements.
Ultimately, China does not see itself as the St. Jude of America, but as a sovereign nation with an old civilization, downtrodden for the last two centuries by Western powers and Japan, but which is on the verge of emerging from the Global Economic Crisis as the preeminent world financial power. It therefore will make decisions on how it allocates its resources and financial reserves not based on America’s desperate borrowing needs to finance its profligate budget deficits, but on serving the supreme long-term national and strategic interests of the People’s Republic of China.