The Wall Street Journal relayed China’s reaction to the S&P downgrade:
SHANGHAI–China has “every right now” to demand the U.S. address its debt problem following the Standard and Poor’s decision to downgrade U.S. government debt for the first time in 70 years, the state-run Xinhua news agency said Saturday.
In a biting commentary, the state news agency urged the international society to improve supervision over the U.S. dollar and said the world may need “a new, stable and secured global reserve currency to avert a catastrophe caused by any single country.”
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said.
China, with over $1 trillion invested in U.S. Treasurys, is among those that would be most immediately affected by any U.S. default or downgrade.
“To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means,” Xinhua said.
“It should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits,” Xinhua added.
More reporting on China’s reaction is here in the New York Times. “The commentary serves as a sharp illustration of how America’s standing in the world is sliding,” the Times opines, “and that China now views itself as ascendant.”
Hours before the downgrade and the PRC’s caustic comments, I interviewed former U.S. Ambassador to China and former Utah governor Jon Huntsman on many aspects of our relationship with the PRC. The complete transcript is posted here. On the subject of the PRC’s holding of trillions in our currency, and that country’s own manipulation of the international currency markets, the candidate said this:
HH: The financial crisis we’re seeing unfold is actually a sovereign debt crisis that is international in scope. And China had a former central banker today, Yu Yongding, come out and say look, we’ve got to let our currency float, we have to stop running up these surpluses. To what extent is China involved in this, responsible for, the imbalance in the world currency markets, given their refusal to let their currency float?
JH: They’re a huge contributor to it. I mean, you’ve got a lot of countries around the world who artificially manipulate their currency in a most uncompetitive way. If you look at China’s currency, called the renminbi, it basically is 17% discounted, so they have a huge advantage in the marketplace. They’ve manipulated it to the point where it has had a distorting effect on our bilateral trade balance, obviously. But it also has a global international economic imbalance as well. And what they are embarking upon, and it’s interesting to note, Hugh, that we now kind of look at forty years of the U.S.-China relationship, Nixon went there in February of ’72, we’re about to get to the forty year mark, and so we’ve got from zero trade back in ’72 to about $400 billion dollars in trade today, soon to overtake Canada as our largest trading relationship anywhere in the world. So is there a responsibility that China has to begin getting some of their fundamentals right, and in accordance with free market principles. Absolutely, they’re a major player, they’re on the world stage. If we’re going to trade with them and expect them to live up to obligations, as everybody does, and they’ve shown, in some cases, very little appetite to do that, you know, we’re going to have problems. But I’m here to tell you that they are undertaking, because they have to, they want to go up the economic ladder, they want to create the largest middle class in the world. Today, it resides in India, probably 300 million strong. But they’re transitioning slowly from the largest export machine this world has ever seen to what will more and more look like a consumption based model. It’s going to be a long, difficult journey for them. They’ve just started it. There’s no certainty that they’re going to get to the end point. And as they move through this transition, I think there are going to be some real disruptions for them, politically and economically, domestically, and I think they know that. But as they proceed with this transition toward more of a consumption based model, they’re going to have to take their currency closer to market valuation, which means that our exporters in the United States are going to have more opportunities to penetrate the Chinese marketplace. We’re going to have more of an advantage, increasingly, because their currency will begin to take on more of a market-based orientation. That’s a good thing. That’s going to take a little bit of a while, a little bit of time. But as this happens, it’s going to be interesting for people who are interested in the subject matter to watch how this thing plays out, because what the Chinese authorities, the party, effectively has to do, they must convince the average person in China to begin taking out their currency, their savings that they usually keep under the mattress, out from under the mattress and deploy it into the marketplace, to become shareholders in their own society. They’ve been very reluctant to do that, because it seems that every 20 years or so, there’s a major upheaval, political upheaval in Chinese society, so you take out your money and you run, because there’s never been any long term stability in the country. So they have to convince their population that they should be investing that money in society. In order to convince the average citizen that this is a good thing to do, they’ve got to build confidence in where China is going. That’s going to be a very expensive undertaking for them. It means they’re going to have to address things like health care reform, with 900 million people in the rural parts of the country. You have to remember that the iron rice bowl is gone, the days of the iron rice bowl. That’s no longer the case. They’ve got to address health care reform in the rural areas. They’ve got to address things like affordable housing. They’ve got to address things like retirement and pension programs. So we look at $3 trillion dollars in foreign exchange reserves that they have, and we say geez, that’s mighty impressive. Wouldn’t it be nice to have that here. But just remember, they’re going to be drawing down on those foreign exchange reserves considerably to make this economic transition completely. All the while, they’ve got serious inflation problems, they have labor costs that are increasing 15-20% per year in the southern manufacturing zones of Guang Zhou, and they have corruption, which is endemic in the system. And all of this is playing against their desired outcome, which is perfect harmony and stability.
Hunstman displays how the president ought to be responding to this downgrade and to the China’s attacks on the U.S. debt –with forceful pushback, and not just against the debt-mongering rhetoric. It would be an excellent time to challenge China on their cyber-warfare against not just the U.S. but the world, as detailed in the new Vanity Fair pieces “Enter the Cyber Dragon” and “Operation Shady Rat.” On that subject Huntsman was equally blunt:
HH: What do you make of, Vanity Fair has a couple of articles on unrestricted cyber warfare, and what apparently is a series of attacks on international agencies, not-for-profits, corporations and governments coming out of Beijing? What are they doing? And what, if you were president, would you say publicly to get them to stop? And do you believe it’s them?
JH: It’s a serious problem, Hugh. Suffice it to say, we tracked it very, very closely in the embassy. We think we know where it’s coming from, and the penetrations here in the United States are widespread, and they go well beyond just the government. They go on to the private side, non-government side, and it’s pervasive. I see it here as an opportunity for the United States to achieve two things. One, we ought to come up with the best technology in the world that would act as an early warning system, and countermeasures against that kind of behavior. That ought to be developed in this country, and we ought to be able to deploy it. So A) we ought to see it as an economic development opportunity. We ought to be sitting down with the smart people in Silicon Valley and say we have an opportunity here to develop new technologies that we’re going to need in the years ahead, because this cyber warfare, cyber intrusion issue isn’t going to go away anytime soon. And two, we need to be very, very aggressive in how we push back.
China’s strident comments on the downgrade could well be part of a “best defense is a good offense” strategy just as the U.S. wakes up to the cyber-attacks, but we shouldn’t be let our focus be turned away from the manipulation of the renmimbi, the cyber-warfare, or the surge in military capabilities, which I also discussed with Huntsman.
President Obama hasn’t said anything about the downgrade, choosing to again “lead from behind,” but perhaps the scorn of the Chinese will prompt even this most passive of presidents to get off of the bench and into the front ranks of people defending the dollar and the country against its “competitors.”