China slams U.S. profligacy

Smarting from Tim Geithner’s comments about China manipulating, its currency, the Chinese have retaliated with a condemnation of U.S. economic policy in the harshest of terms. At the World Economic Forum, Chinese Premier Wen went on the attack, accusing the United States of undisciplined profligacy.

As I indicated just yesterday, irrespective of Geithner’s motives in branding China a currency manipulator, his language was unwise. Further comments of these sorts can only increase tensions between China and the U.S.

Premier Wen admitted the global crisis had hit China severely, producing shrinking external demand, overcapacity in some sectors, difficult business conditions for enterprises and rising unemployment in cities.

But he pointed to increased bank lending that had continued into January, suggesting that consumption was still growing by around 20 per cent. He said both inventories of goods at Chinese ports and the prices of major industrial goods had increased.

China had acted responsibly to fend off the crisis by implementing a 4 trillion yuan ($580 billion) fiscal stimulus of budget spending and tax cuts over two years.

The Chinese Premier contrasted this with the major causes of the crisis, which he put down to “inappropriate macroeconomic policies of some economies and their unsustainable model of development, characterised by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit; lack of self-discipline among financial institutions and ratings agencies and ensuing distortion of risk information and asset pricing; and the failure of financial supervision and regulation to keep up with financial innovations, which allowed the risks of financial derivatives to build and spread”.

Without mentioning the US by name, this was a clear attack on excessive pre-crisis consumer spending in America, which was financed largely by imported Chinese savings and on the failures of the US banking system and its regulators.

In contrast, Mr Wen said Chinese banks were well run and had maintained capital reserves above internationally mandated requirements.

His comments served as a reply to controversial claims by the newly appointed US Treasury Secretary, Timothy Geithner, that China was “manipulating” its currency by artificially holding down its value against the US dollar and supposedly swelling the US trade deficit.

Mr Geithner’s call for China to appreciate its currency was savaged by the chairman of Morgan Stanley in Asia, Stephen Roach, who described it as “horrible advice given to the Chinese”.

“’It is an example of how very real the protectionism risks are. We are moving into a period of even more pressure on labour, higher unemployment on the rise of a tide of economic nationalism.”

Mr Wen said his message to the Obama administration was that it was imperative for China and the US to enhance their co-operation – a confrontational relationship would make them both “losers”.

Many have argued that Geithner was playing to a domestic audience. Nevertheless, I see his statements as reckless — the sort of thing that could create a protectionist and retaliatory atmosphere in the U.S., China, Europe and elsewhere.

It will be instructive for all of us to learn how the Obama Administration responds to Premier Wen’s comments. My advice: don’t respond at all. Keep your eye on the task at hand, which is fixing the broken U.S. economy and banking system.

China and Russia slam the US – The Australian
WEF 2009: China warns over protectionism – Telegraph

  1. Emma says

    Hmmm, I dunno. When your primary banker is giving you a talking to, is it really wise to ignore what they have to say? I think most of what Wen had to say about the pre-crisis financial culture in the US is spot on. Not only that, I suspect Obama agrees with him.

    In my opinion, the Obama administration needs to consider not only the economic ramifications of having China as their primary lender but also the potential national security issues that may entail. I suspect the US needs to get up, dust itself off and get back to work in order to earn back the respect of the Chinese and make them feel that the trillions of dollars they have invested in that country was worth it AND to prevent them from hitting the red button. They CAN manipulate the situation through their currency. It’s their nuke, so to speak, and they can have their finger approach that red button whenever they want.

    Could be that the Obama administration was sending a signal to let them know that they are aware of the red button while at the same time Obama’s speech addressed the economic concerns that China has for the US by letting them know he gets it, on all fronts.

    I’m just speculating of course, it’s such fun. :)

  2. lark says

    “Free market” plus current account deficits have resulted in a global labor arbitrage. Americans went into debt because their wages did not rise with productivity. Why? Because of low wage competition overseas.

    It seems to me the illness we face has much to do with the open markets that have been foisted on the first world workers. As a corrective, a bracing course of protectionism may be what is good for us in the long run.

  3. Ranger Turtle says

    I, too, listened to Premier Wen, and thought he was correct in facts but lacked diplomacy.
    My belief is that both countries are trying to fend off protectionism. Protectionism during bad economic times can be interpreted as aggressive. Let’s hope Pres.Obama and Prem.Wen can tone it down.

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