10/22/2013 05:53 PM
Shutdown Specter
US Fumbling Puts China at Risk
The whole world looked on as the United States embarrassed itself for three weeks with its government shutdown. China, the only other superpower, profited from the domestic dispute -- but as Washington's largest creditor, it also has cause for concern.A little before 11 a.m. last Wednesday, a newly crowned Miss America announced her presence at the White House via Twitter. At the time, most US politicians had nothing on their minds except their country's budget conflict, with Democrats and Republicans in Congress unable to agree on a new national debt limit for nearly three weeks.
Then, on Wednesday, Congress was set to begin a decisive round of voting to save the country and the global economy. Even as television commentators feverishly awaited the results of the Congressional vote, this year's Miss America, 24-year-old Nina Davuluri, tweeted: "Had the pleasure of having a conversation with President @BarackObama in the Oval Office today!"
"President Barack Obama appears to be multitasking," news channel CNN scoffed about the president simultaneously steering the nation through a budget crisis and finding time to talk to the beautiful Indian-American Davuluri.
In the preceding weeks, however, Obama seemed to find it difficult to multitask, cancelling meetings with a number of important, influential allies and investors and even calling off a trip to Asia during which he had planned to meet with Chinese President Xi Jinping.
Global Embarrassment
The United States had embarrassed itself on the global stage when Republican members of Congress blocked President Obama's healthcare reform, also known as "Obamacare," by refusing to approve an increase to the country's debt limit necessary to fund the reform. This forced the government to shut down its administration, making 800,000 government employees take unpaid mandatory leave, and amounted to the US voluntarily inflicting damage on itself. The political opponents didn't manage to reach an agreement -- and even then, only a temporary one -- until last Wednesday, under enormous pressure and at the last minute. Is this how a superpower behaves?
Those weeks during which the US feared for its financial solvency showed just how vulnerable the country is. Yet at the same time, the episode showed America's strength. No other country could afford to engage in such drama without being punished by financial markets, creditors and trade partners.
But can even the US really afford it? Credit rating agency Standard & Poor's calculates the shutdown inflicted $24 billion (€18 billion) in economic damage. But the true damage here is of a political nature, with China, the world's other superpower, now openly expressing its doubts about the US.
'Building a De-Americanized World'
In a commentary published last week by Xinhua, Beijing's state-owned news agency, commentator Liu Chang wrote: "As US politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world."
Creating such a world calls for "several corner stones," the commentary continued, among them all countries adhering to "the basic principles of international law" and recognizing the international authority of the United Nations. "That means no one has the right to wage any form of military action against others without a UN mandate," Xinhua wrote.
The global financial system would also require "some substantial reforms," the news agency said. "The developing and emerging market economies need to have more say in major international financial institutions including the World Bank and the International Monetary Fund." Xinhua also suggested "the introduction of a new international reserve currency that is to be created to replace the dominant US dollar, so that the international community could permanently stay away from the spill-over of the intensifying domestic political turmoil in the United States."
There are many reasons for China's current self-assuredness, and one of them is embodied by a grand, granite-colored building at 32 Chengfang Street in Beijing. This is the headquarters of China's central bank, and every month its accounts receive around $3 billion from Washington, in interest on American treasury securities -- debt of the world's largest economy held by its second largest.
The Chinese government is sitting atop a mountain of cash unlike anything seen before. Its foreign currency reserves totalled $3.66 trillion at the end of September, $163 billion more than in June. Two more quarters of such inexorable growth would see that figure nearly reaching the $4 trillion mark.
China Attracting Money Faster Than Ever
And while Washington was arduously averting national bankruptcy last week, Beijing broke another financial record when China's currency, the yuan, reached its highest value against the dollar since 1993. Although investors are pulling back from most emerging markets, money is flowing into China faster than ever.
Around one third of China's foreign currency reserves -- even the People's Bank of China doesn't cite an exact figure -- are invested in US bonds. That makes China the US's largest foreign creditor, and that fact poses a problem for Beijing as well.
China has been issuing warnings to the US since the start of the recent shutdown crisis. Beijing is keeping "a close eye" on the conflict in Washington, said Premier Li Keqiang, who is also his country's top economic policy specialist. Deputy Finance Minister Zhu Guangyao added: "In the long term, America needs to solve its debt problem, to prevent the global economy from slumping."
Even so, China has been only too glad to make use of the vacuum the US budget crisis has created on its own doorstep. President Xi attended one of the two summits in Asia that his counterpart Obama skipped. Xi also traveled to Jakarta, where Obama spent part of his childhood, and to Malaysia.
During this time, Xi signed trade agreements worth $30 billion. Premier Li, meanwhile, traveled to a summit of the Association of Southeast Asian Nations (ASEAN) in Brunei, then continued on to Thailand and Vietnam.
The World's Largest Creditor
But even as America's current weakness plays to China's political advantage, it also poses financial risks. Seldom has a single quotation summed up the state of global politics like one uttered by late US billionaire J. Paul Getty: "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
As the world's largest debtor and creditor, the US and China are mutually dependent on one another. Chinese economists are advising their central bank to start selling off its US bonds before the next round of the American budget crisis hits. Time is of the essence, with the conflict in Washington likely to start up again by Jan. 15 at the latest, when the newly negotiated interim budget expires.
But by selling bonds, Beijing's central bank would be hurting itself as well. The value of the dollar would drop, meaning China's dollar wealth, too, would decline. The two economic giants are inseparably entwined.
At the moment, it looks like Washington will encounter problems in its next round of budget negotiations as well. The frontline between the Republicans and Obama's Democrats hasn't budged from where it has been ever since the two parties first dug in. And the radical minority of Tea Party Congressional representatives within the Republican Party isn't giving up in the face of its recent defeat. Quite the opposite, in fact. "The fight revved up the four-year-old Tea Party movement," the Washington Post wrote on Oct. 17.
Tea Party's Firm Hold
Republicans similarly paralyzed their country's government, then under President Bill Clinton, for 26 days in 1995-1996, but eventually backed down, fearing voters' anger. These days, representatives from the right-wing Tea Party have little need to fear their supporters turning away from them. Their electoral districts have been redrawn in such a way over recent years that losing to a Democratic challenger has become almost an impossibility. At most, Tea Party candidates could post a challenge to other Republican politicians.
Republican Senator Ted Cruz, spokesman and architect of the weeks-long blockade, is being hailed as a hero by his supporters. In a straw poll at a conservative "Values Voter Summit" last week, Cruz received a majority of the votes, leading to speculation that he would run for his party's nomination in the 2016 presidential election.
The pro-business Wall Street Journal has been smug in tone in recent weeks in its coverage of voices abroad that are critical of the US and of government ministers and central bank directors wringing their hands over the situation. The newspaper has written of "Shutdownfreude."
But the critics include the Chinese, as well. America's budget conflict has served as a "wake-up call" for China, says American economist Nicholas Lardy. Lardy advises Chinese decision-makers to "quit adding to their foreign reserves." Kenneth Rogoff, former chief economist at the International Monetary Fund (IMF), describes this as "a kick in the pants" for China. The US budget situation has led to China signing currency swap agreements with the European Central Bank (ECB) sooner than expected. These agreements make the yuan internationally tradable, a step toward competing with the dollar as a reserve currency.
Pacific Power
A few years ago, Obama was still able to stave off China's growing power in the Pacific region by focusing his attention on Asia's emergent economic powers. He invested a great deal in this new approach, sending troops to Australia, signing new trade agreements and promising Malaysia and Indonesia he would regularly attend ASEAN summits -- something he has now called off.
With the departure of Hillary Clinton as Secretary of State and Tom Donilon as National Security Advisor, the US government has lost further important advocates of a pro-Asia course. And Obama himself now seems more concerned with the Arab Spring, Syria and Iran than with the Pacific. In his most recent speech at the UN General Assembly, the US president mentioned Syria, Egypt, Iran and Israel a total of 68 times, according to Time magazine, but China only once.
Another country in the same region gets barely a mention these days: Japan. America's Pacific ally is deeply at odds with China, but does have one concern in common with its Asian rival. Its $1.1 trillion in US bonds make Tokyo the US's second biggest foreign creditor after Beijing.
In Japan, where the magazine Newsweek still appears in print, despite existing only in digital form in the US, last week's cover bore the image of a frayed American flag and above it the headline: "Ruined America -- a Superpower Destroys Itself."
Translated from the German by Ella Ornstein
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