China side-steping U.S. financial crisis with innovative strategies

After watching Congress play politics and care not a whit about upholding the honor of United States, can the world assume that America is not about to become a deadbeat to beat all deadbeat nations in history?

Even if the United States Treasury eventually honors its obligations after undergoing the tortuous exercise between House, Senate and the White House, will the rest of the world continue to have faith and confidence in the value of the dollar?

China, the country that holds more U.S. federal debt than any other foreign country, is taking action to sidestep potential future U.S. default.

China’s Move From Dollars to Hard Assets

Even at the outset of the financial crisis, Beijing asked Washington to keep the value of the dollar from sliding. Members of the Obama administration serially assured China that the United States would uphold the integrity of the dollar, maintaining as deadpan a demeanor as possible, while knowing that printing more money is inevitable.

Of course, no one in Beijing took the U.S. assurance to the bank. Instead, China has been actively investing declining dollars into hard assets, such as oil fields and mineral deposits in Africa, Australia and Latin America.

Since the activity of China’s central bank is not transparent to outsiders, we can only speculate that China has also been diversifying its foreign exchange holdings into other currencies. However, no other currency has large enough circulating volume to allow China to fully divest out of dollars by exchanging into it.

The other means that China and other U.S. debt-holders can stay clear of depending too much on the dollar is to conduct bilateral trade based on bilateral currency swap agreements. These transactions would allow the use of the Chinese yuan rather than the dollar to settle the trades. China has entered such agreements with selected countries, such as Brazil, Russia and South Korea. This is considered a step towards internationalizing China’s Renminbi.

Playing Political Chicken with National Debt

In May, I attended an international conference on global financial security in Beijing. All the speakers, both those from China and other countries, expressed concern about what action the U.S. will take to stabilize the world financial markets. None expected the American politicians to play political chicken and brinksmanship with the U.S. National Debt, throwing America’s prestige and image down the sewer.

Since America’s financial collapse dragged the world down -- a result China sidestepped with its own considerably more effective stimulus plan -- China has regarded the United States with glasses tinged in skepticism. China’s economic stimulus meant more superhighways and bridges, as well as a high-speed rail system, becoming the envy of the world, the recent rail accident notwithstanding.

China has, since 2008, formulated a national development plan placing reduced reliance on export. Its emphasis has been away from labor-intensive, low-cost goods and aimed at higher-valued new manufacturing. A recent Wall Street Journal article reported that multinational corporations are placing their high-value manufacturing investments near foreign markets where they are making profits, not in the United States.

China has continued to invest in education and allocate more of its national budget for research and development. Hundreds of thousands of graduates, mostly in technical disciplines, have gone overseas for graduate education. Many have returned to China to found companies that are competing on the global market, such as Baidu, Huawei and Suntech.

These companies compete on their proprietary innovations. With a pipeline of well-trained technologists, there will be more coming from China. The United States, with an increasingly dilapidated education system, will need a steady infusion of foreign students to keep pace.

Two Wars and Dysfunction

The U.S. is mired in two wars it can’t win. Now the dysfunction of Washington has been laid open for all to see. China is too diplomatic to question America’s vulnerability. But will the rest of the world continue to see America as the sure-footed, hegemonic power they can count on to step in as the ultimate peacemaker?

Now that the world has seen America’s much touted democracy in action in Washington, China is even more certain not to copy the United States. It’s not at all certain that the eventual accord reached by Congress will create jobs and restore the dignity of the millions of Americans seeking employment.

It is also not lost on the international community that cuts in social programs from the debt-ceiling deal will consign many Americans to dire poverty and homelessness, or worse.

Some pundits still insist that America remains a great power and that eventually the country will pull out of this downward spiral. Many anxious investors in China would like to know how.

[Source: By George Koo, Xinhua, Beijing, 08Aug11]

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