Monday 18 December 2017

Biden lands in China carrying message of reassurance on US debt

US Vice-President Joe Biden talks to Chinese ambassador to the US, Zhang Yesui (right), as
US ambassador to China Gary Locke looks on before a US-China friendly basketball match
held at the Olympics sports centre in Beijing yesterday
US Vice-President Joe Biden talks to Chinese ambassador to the US, Zhang Yesui (right), as US ambassador to China Gary Locke looks on before a US-China friendly basketball match held at the Olympics sports centre in Beijing yesterday

Kate Andersen Brower

US Vice-President Joe Biden landed in Beijing yesterday carrying a simple message for his hosts: your money is safe with us. At the outset of his three-nation Asia tour, he will seek to allay concerns being expressed in China -- the biggest foreign holder of US Treasuries -- that the deficit deal struck by Congress and the Obama administration earlier this month doesn't go far enough to rein in the nation's long-term debt and that US growth will stall.

"The last few weeks have put a new item on the Chinese agenda," said Jeff Bader, who was senior director for Asia affairs at the National Security Council until April and is now a visiting scholar with the John L Thornton China Centre at the Brookings Institution. "The Chinese will be looking for an explanation of the broad future of the US economy."

Mr Biden's arrival follows questions from Chinese leaders about America's economic leadership in the world amid persistent tensions over trade and currency. A day after Standard & Poor's downgraded US debt to AA+ from AAA, China's official Xinhua News Agency issued a warning: "The US government has to come to terms with the painful fact that the good old days when it could borrow its way out of messes of its own making are finally gone."

In a commentary yesterday, Xinhua said "runaway" US debt was "a ticking time bomb".

In an interview with China's 'Caijing' magazine, Mr Biden said the administration "is deeply committed to maintaining the fundamentals of the US economy" so as to "ensure the safety, liquidity, and value of US Treasury obligations for all of its investors".

Mr Biden was greeted at Beijing airport by new US Ambassador to China Gary Locke and Chinese Foreign Minister Yang Jiechi.

S&P's downgrade led to a rollercoaster week for US stock indexes, sparking a global equity-market sell-off that wiped out about $7 trillion (€4.8tn).


Undeterred by the decision, investors snapped up Treasuries on signs of slowing growth and a widening debt crisis in Europe. The yield on generic 10-year government debt fell as low as 2.1pc on August 10, and has declined almost 25pc since the company said it may cut the nation's debt rating on July 14.

The economies of the US and China, the No 1 and No 2 largest in the world, are increasingly intertwined. China held $1.17tn of US debt in June, according to Treasury Department data, and it relies on exports to the US to help fuel its economic growth. The US trade gap with China increased to $26.7bn in June, the widest since September, from $25bn in May. Imports from China rose to the highest level since November.

In the short term, analysts say, China won't sell its Treasury holdings. That could change if its leaders lose confidence in the stability of the US economy, said J Stapleton Roy, director of the Kissinger Institute on China and the US ambassador there from 1991 to 1995.

"China's looking for alternatives, and to the extent that it can reduce its dependence on US Treasuries it will," Mr Roy said.

China's Treasury holdings, while down from their high of $1.18tn in October, have increased for the past three months, according to data compiled by Bloomberg.

Mr Biden will try to reassure the Chinese that the US is getting its fiscal house in order.

"The vice-president will be in a good position to talk about the very strong deficit-reduction package that we concluded here recently," Treasury undersecretary for international affairs Lael Brainard said.

"Obviously, the United States has the capacity, the will, and the commitment to tackle our major fiscal and economic challenges."

Another source of friction in the relationship is China's currency valuation. The yuan has strengthened beyond 6.40 per dollar for the first time since 1993.

Mr Biden will "put special emphasis" on China's currency, which "remains substantially undervalued", Mr Brainard said. "It's very important for global growth; it's of course critically important for US exports and jobs."

The yuan gained the most since 2007 last week as consumer prices in China rose 6.5pc in July, the most in three years, and the nation's trade surplus widened 41pc to $31.5bn, government reports showed.

The currency issue plays into tensions in the US over trade. Senator Sherrod Brown, an Ohio Democrat, said in an interview that the administration hasn't done enough to correct the imbalance.

"American patience is running short," said Mr Brown, who has introduced legislation with Senator Olympia Snowe of Maine to address the value of the yuan. "We've allowed China to basically finance their economy with exports to us, and we continue to allow that to happen."

According to a June study by the Washington-based Economic Policy Institute, which studies issues affecting low- and middle-income workers, if the yuan and satellite currencies were revalued to their equilibrium levels, US gross domestic product would increase as much as 1.9pc and as many as 2.25 million US jobs would be created.

Caterpillar Group president Rich Lavin, whose responsibilities include emerging markets, said the world's largest construction and mining-equipment maker, is growing "aggressively" in China.

The Peoria, Illinois-based company, and its dealers, have almost 20,000 employees in China. With 16 manufacturing facilities in place there, the company is either breaking ground or has already started construction on almost half a dozen more.

Still, Mr Lavin said China needed to make it easier for US businesses. "We welcome competition but we just want to make sure the playing field in China is even for US competitors," he said.

While in China, Mr Biden will also try to establish a relationship with his counterpart, Vice-President Xi Jinping, who is likely to succeed President Hu Jintao next year.


"Biden will try to get a sense of Xi's style, his priorities, his qualities," said Kenneth Lieberthal, senior fellow and director of the John L Thornton China Centre. The vice president and his aides should be "taking careful notes on who else is in the room" advising Mr Xi.

Mr Biden is also scheduled to meet with Mr Hu and Premier Wen Jiabao.

After Beijing, Mr Biden will visit Chengdu, in south-western China and travel to Ulan Bator, Mongolia. The nine-day trip will end in Japan, where Mr Biden will reaffirm US support for the country as it recovers from the March earthquake and tsunami that led to radiation leaks at the Tokyo Electric Power Company's Fukushima Dai-Ichi nuclear power plant.

North Korea and Iran's nuclear weapons programmes; security issues in Afghanistan and Pakistan; improving the protection of intellectual property rights; Taiwan, Tibet and human rights will all come up during the China segment of the trip, said Daniel Russel, senior director for Asian affairs on Obama's National Security Council.

Those issues will take a backseat to economic concerns.

"The economy will be topic one, two, three, and four," said Daniel Sneider, associate director for research at the Walter H Shorenstein Asia-Pacific Research Centre at Stanford University.

"And I don't suppose the Chinese are unhappy about finding themselves in a position where they can lecture us about our profligate ways." (Bloomberg)

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