Article

Bond Market Won’t Keep U.S. From Raising Pressure On China

Daniel H. Rosen November 7, 2011

In his Congressional re-confirmation hearings on December 3, U.S. Federal Reserve Chairman Ben Bernanke said that low U.S. interest rates aren’t fueling asset bubbles in the U.S., and if they are doing so in China, that’s not his problem.

“Countries that are concerned about that have their own tools to address bubbles in their own countries,” he argued, essentially telling China to stop undervaluing its currency, the yuan or renminbi, if it wants to fix this problem.

He was reminding China that it is not the responsibility of the U.S. to help China avoid adjusting its exchange rate. China’s head bank regulator, Liu Mingkang, had welcomed President Obama to China with prickly allegations about low U.S. interest rates causing Chinese asset bubbles; Bernanke sees it a different way and — surprisingly — seems ready to say so.

Bernanke’s bluntness was unusual because people assume the U.S. is now dependent on China to buy its debt. But the preoccupation with whether China will turn its back on Treasurys market may have peaked. Along with modest (at best) results of President Obama’s soft-spoken approach in Beijing, that will elicit a more assertive attitude in Congress.

The U.S. personal savings rate rose from 1% of income in early 2008 to as high as 5% in mid-2009, so the share of U.S. debt financed by Americans themselves is rising. The flip-side of this is a decrease in U.S. imports, helping to shrink China’s current account surplus — China’s principle source of U.S. dollars to be recycled into Treasury bills and notes. Further, China has made clear that it intends to diversify what dollars it does have into assets other than Treasurys, for instance by supporting state firms that wish to make direct investments abroad.

By the second quarter of 2010, legislators will be rolling out new measures to pressure China on exchange rates and trade surpluses.

Will stepped-up U.S. pressure on China’s exchange rate cause anxiety about purchases of Treasury debt? Some, but probably less than some once thought, since a contracting U.S. current account deficit has left less to finance. The idea that the U.S. should maximize Chinese interests in setting domestic monetary policy would produce far more anxiety in the long-term. Courtesy to a major lender cannot trump core domestic interests. That would be profoundly unsustainable, and invite more speculation than any resumption of U.S. pressure on the yuan.

President Obama’s China trip provided a potent reminder that it is not China’s responsibility to hand concessions to the U.S. to make the administration look good: China has domestic interests and priorities, and it will not compromise them in order to placate others.

In fact the president’s trip achieved quite a lot, especially in terms of laying groundwork for substantial cooperation on cleaner energy. But China offered nothing that would convince American politicians that they should put international interests ahead of narrow U.S. interests. It is not the U.S.’ responsibility to do that either.