Uneasy Co-Dependency for US & China

By Keith Richburg, Washington Post - November 16, 2009

BEIJING -- The U.S. and Chinese economies -- the world's largest and the fastest-growing major economy, respectively -- have become inextricably intertwined, locked in a kind of co-dependency that neither side thinks is particularly healthy, but which for the moment neither will move to break.

As President Obama begins his three-day visit to China on Monday, he finds himself in a country that depends largely on the United States as the most important market for its cheap goods. America, with growing budget deficits and a huge national debt, depends on China as the main holder of U.S. Treasury securities, with Beijing's stockpile officially estimated to be nearly $800 billion.

The arrangement has created what many have called a modern economic version of the old Cold War doctrine of mutual assured destruction: Either side could wreak havoc on the other, but would be guaranteed to scuttle its own economy in the process.

"We are in a fairly advanced stage of economic mutual interdependence," said Kenneth Lieberthal, a China specialist with the Brookings Institution in Washington. "I think the Chinese can pull the rug out from under our economy only if they want to pull the rug out from under themselves."

Some U.S. economists and members of Congress have expressed alarm about a loss of economic sovereignty, and about America's being "in hock" to China. Beijing could try to wreck the American economy by dumping U.S. Treasury securities, they warn, or move to influence U.S. policy on sensitive political issues, like Taiwan, with the threat of dumping securities.

But some of their Chinese counterparts fear that the large holdings of U.S. debt amount to a financial tether, making China "a prisoner" of the U.S. dollar.

"We are really put in a corner," said Yu Yongding, an economist with the Chinese Academy of Social Sciences. "China will not take any irrational action. We don't want to hurt you -- because if we hurt you, we hurt ourselves first. It's a kind of synergy."

Nicholas R. Lardy, a China expert with the Peterson Institute for International Economics, agreed that the Chinese government has little incentive to begin any large sell-off of U.S. securities, and probably could not find a market to buy them even if it did. "If it was known they were beginning to sell their holdings, prices would come down and they'd take bigger losses. They'd be shooting themselves in the foot," he said.

"They're in the dollar trap," Lardy said. "There's no easy way out of it."

Lieberthal said the fact that China holds so much U.S. dollar debt makes it "extremely cautious" of any actions that might hurt the American economy -- and damage its own considerable investment. But unlike the Cold War, he said, the current economic version of a stalemate is not necessarily antagonistic; both sides benefit.

"I think it is neither of our interests to see that unravel," Lieberthal said. "If we can find ways to manage our differences and cooperate where we can, we both win. If not, we both lose."

China's dependence on the U.S. market for exports is perhaps most strongly felt in Guangdong province in the south, and particularly in the industrial city of Dongguan. There factories churn out shoes, clothing, machine parts and Christmas toys, most destined for American cities and towns.

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