U.S. Budget Is Scrutinized by Chinese Bankers
No sooner had President Obama greeted nearly 200 of the bankers, bureaucrats and policymakers who could make or break his economic plans on Monday than they started grilling his economic team with the hardest questions about his economic strategy.
How long are these huge deficits sustainable, they wanted to know. How long do you keep stimulating the economy, and when do you break for the exits? If the dollar nosedives compared other major currencies, what’s the administration’s Plan B?
The questions were mostly asked in Chinese — by a delegation from Beijing that, diplomatic niceties aside, has come to check in on the investment of more than $1.5 trillion that China has made in United States government-issued securities.
“We are concerned about the security of our financial assets,” China’s assistant finance minister, Zhu Guangyao, said with uncharacteristic bluntness during a briefing for reporters covering the “U.S.-China Strategic and Economic Dialogue” on Monday.
It was a comment that underscored how much the global financial crisis has changed the subtle balance of power in meetings of “the G-2,” the shorthand now used to describe sessions between the world’s largest economy and its fastest-rising economic power. Gone, probably forever, are the days when American delegations would show up in Beijing with advice about how the Chinese could become a “responsible stakeholder” in the world — the phrase coined by the Bush administration. The demands that the Chinese let their currency appreciate, clean up their banks or get rid of the subsidies for state-owned enterprises have been toned down.
You do not talk to your biggest creditor that way — especially when you have a record-sized loan application pending.
Throughout the two-day conference, which ends Tuesday, the subtext has been that Mr. Obama must persuade more than just Blue Dog Democrats, moderate Republicans and skeptical economists that he has a plausible long-term plan to bring down a record-breaking federal deficit. He also has to convince the occupants of the Great Hall of the People, whom he needed to show up at this week’s $200 billion Treasury auction, and the many auctions that will follow.
They will show up — but the lingering question for the next few years is how often, and how enthusiastically they will bid.
There is little real danger, despite the periodic warnings from cable-television doomsayers, that the Chinese will sell off their huge holdings in American debt. As one senior Chinese official involved in the country’s investment strategy put it several weeks ago, “As the biggest holder of Treasuries, we would suffer the most from starting a panic.” The euro and the yen do not seem especially attractive — China’s most expensive import is oil, and oil is still priced in dollars.
But domestic pressure is growing on the Chinese government to proceed with care. One of the first big investments by China’s state-run sovereign wealth fund was a $3 billon stake in the Blackstone Group; when it went sour two years ago, the Chinese press printed angry screeds about how the government had gambled and lost the country’s assets.
When Fannie Mae went into freefall last year, Chinese officials were on the phone to the United States Treasury, demanding an explanation about how their investment in the mortgage agency’s bonds would be protected. There were no threats made about the future of Chinese investments in the United States, but the message was clear. Ultimately, China was protected when the Bush administration took over control of the housing lender in September, one of the government’s first steps to try to halt a broader financial implosion.
Now, with the immediate crisis past, China’s questions have taken a different turn. The sessions yesterday — attended by the Treasury secretary, Timothy Geithner; by the chairman of the Federal Reserve, Ben Bernanke; and by the director of the National Economic Council, Lawrence H. Summers — were dominated by questions about how quickly the United States could halt the huge deficit spending.
“I think there were serious questions about what the economic outlook is, what our plans are for withdrawing some of the stimulus — you know, when we think the right time to do that is, to bring our fiscal deficit down to a sustainable level,” the Treasury’s coordinator for China affairs, David Loevinger, said on Monday evening.
The administration, Mr. Loevinger said, brought along Peter Orszag, the budget director, to make the case to the Chinese. He “was very clear — and he was also backed up by Summers on this — that the fiscal stimulus we’ve put in place was necessary and it’s the right thing and it’s designed to extend through 2011, but it’s not sustainable at the current rate and that we’re committed by the end of the Obama administration to bring it down to a sustainable level,” he said.
Even five years ago, it would have been hard to imagine any administration trotting out its budget director to justify fiscal strategy to the Chinese. But as Mr. Obama said, slightly amending a phrase that once was commonly used to describe the United States-Japan relationship, the interchange between the America and China now is as “important as any bilateral relationship in the world.”
Mr. Obama has a big agenda for it — joint action on global warming, on containing North Korea and Iran, on nudging the Chinese away from their neuralgic views of Taiwan and Tibet. So far the Chinese have insisted that they have no plans to use their financial leverage to influence American policy — just as Mr. Obama has said he will not use the government’s role as the majority shareholder in General Motors to dictate what kind of cars the company makes.
Skeptics abound on both pledges. Financial crises can change the balance of power as surely as wars do — but it may be a few years before we know how that power is employed.
No sooner had President Obama greeted nearly 200 of the bankers, bureaucrats and policymakers who could make or break his economic plans on Monday than they started grilling his economic team with the hardest questions about his economic strategy.
How long are these huge deficits sustainable, they wanted to know. How long do you keep stimulating the economy, and when do you break for the exits? If the dollar nosedives compared other major currencies, what’s the administration’s Plan B?
The questions were mostly asked in Chinese — by a delegation from Beijing that, diplomatic niceties aside, has come to check in on the investment of more than $1.5 trillion that China has made in United States government-issued securities.
“We are concerned about the security of our financial assets,” China’s assistant finance minister, Zhu Guangyao, said with uncharacteristic bluntness during a briefing for reporters covering the “U.S.-China Strategic and Economic Dialogue” on Monday.
It was a comment that underscored how much the global financial crisis has changed the subtle balance of power in meetings of “the G-2,” the shorthand now used to describe sessions between the world’s largest economy and its fastest-rising economic power. Gone, probably forever, are the days when American delegations would show up in Beijing with advice about how the Chinese could become a “responsible stakeholder” in the world — the phrase coined by the Bush administration. The demands that the Chinese let their currency appreciate, clean up their banks or get rid of the subsidies for state-owned enterprises have been toned down.
You do not talk to your biggest creditor that way — especially when you have a record-sized loan application pending.
Throughout the two-day conference, which ends Tuesday, the subtext has been that Mr. Obama must persuade more than just Blue Dog Democrats, moderate Republicans and skeptical economists that he has a plausible long-term plan to bring down a record-breaking federal deficit. He also has to convince the occupants of the Great Hall of the People, whom he needed to show up at this week’s $200 billion Treasury auction, and the many auctions that will follow.
They will show up — but the lingering question for the next few years is how often, and how enthusiastically they will bid.
There is little real danger, despite the periodic warnings from cable-television doomsayers, that the Chinese will sell off their huge holdings in American debt. As one senior Chinese official involved in the country’s investment strategy put it several weeks ago, “As the biggest holder of Treasuries, we would suffer the most from starting a panic.” The euro and the yen do not seem especially attractive — China’s most expensive import is oil, and oil is still priced in dollars.
But domestic pressure is growing on the Chinese government to proceed with care. One of the first big investments by China’s state-run sovereign wealth fund was a $3 billon stake in the Blackstone Group; when it went sour two years ago, the Chinese press printed angry screeds about how the government had gambled and lost the country’s assets.
When Fannie Mae went into freefall last year, Chinese officials were on the phone to the United States Treasury, demanding an explanation about how their investment in the mortgage agency’s bonds would be protected. There were no threats made about the future of Chinese investments in the United States, but the message was clear. Ultimately, China was protected when the Bush administration took over control of the housing lender in September, one of the government’s first steps to try to halt a broader financial implosion.
Now, with the immediate crisis past, China’s questions have taken a different turn. The sessions yesterday — attended by the Treasury secretary, Timothy Geithner; by the chairman of the Federal Reserve, Ben Bernanke; and by the director of the National Economic Council, Lawrence H. Summers — were dominated by questions about how quickly the United States could halt the huge deficit spending.
“I think there were serious questions about what the economic outlook is, what our plans are for withdrawing some of the stimulus — you know, when we think the right time to do that is, to bring our fiscal deficit down to a sustainable level,” the Treasury’s coordinator for China affairs, David Loevinger, said on Monday evening.
The administration, Mr. Loevinger said, brought along Peter Orszag, the budget director, to make the case to the Chinese. He “was very clear — and he was also backed up by Summers on this — that the fiscal stimulus we’ve put in place was necessary and it’s the right thing and it’s designed to extend through 2011, but it’s not sustainable at the current rate and that we’re committed by the end of the Obama administration to bring it down to a sustainable level,” he said.
Even five years ago, it would have been hard to imagine any administration trotting out its budget director to justify fiscal strategy to the Chinese. But as Mr. Obama said, slightly amending a phrase that once was commonly used to describe the United States-Japan relationship, the interchange between the America and China now is as “important as any bilateral relationship in the world.”
Mr. Obama has a big agenda for it — joint action on global warming, on containing North Korea and Iran, on nudging the Chinese away from their neuralgic views of Taiwan and Tibet. So far the Chinese have insisted that they have no plans to use their financial leverage to influence American policy — just as Mr. Obama has said he will not use the government’s role as the majority shareholder in General Motors to dictate what kind of cars the company makes.
Skeptics abound on both pledges. Financial crises can change the balance of power as surely as wars do — but it may be a few years before we know how that power is employed.
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