以怨报德: China's disingenuous complaint

I find the recent voices (from as high up as Wen Jiabao) about China afraid of losing in its investments in US Treasuries to be either uninformed or disingenuous.

Yes, on a superficial level the Chinese currently own X amount of US securities, which include Treasuries ($800 billion?), agency debt and other instruments. But that’s only its current market value if you evaluate it on a Micro level.

When China received dollars as part of its trade surplus with the United States, it could have done whatever it wanted with them. Why did it plow it into Treasuries and agencies? As a deliberate national policy to keep the RMB from appreciating, and to provide employment and economic growth. It was the best policy available to China at the time, especially given competitive pressures from neighboring Asian economies. If Americans had not been so prodigious with their spending since the 1980s (see chart), the Chinese economy would not have grown so quickly and many fewer peasants would have been urbanized and many fewer Chinese would have built up human and physical capital.


Chart 1: Asia's Sugar Daddy, US Savings Rate

The Treasuries are likely not worth in the long-run what they are today, because in the long run the imbalances have to unwind. In fact, success of China's economic policy would ceteris paribus, result in appreciation against the dollar as the Chinese economy expands. And it was far better to grow the economy faster and “lose” some money on this "vendor financing" of the United States. In the real economy, this policy translated to quicker urbanization, more technology and skill transfers, and experience running businesses, etc. Imagine an apprentice or an intern willing to work for a master for low pay. The experience and skills are worth it. In fact, when you are young and entry level, you want your boss to display some sloth and give you more work to do. You need the experience more than the money.

So in conclusion, no one told China they had to buy Treasuries. They did it as deliberate national policy to hold the value of the RMB constant, and got a lot of benefits in the form of a faster growing economy and more development of skills in China (sorry to say this for the third time). In fact, one of the first things they teach students of economics is that Macro-level analysis (economic growth) is much different animal than Micro-level (gains or losses in a balance sheet). For example, an stimulate fiscal policy might lift government debt, but in many situations it might lift long-run growth to be able to cover the deficit. However, a deficit level is much easier to criticize than a counterfactual (what if stimulus was not spent) is able to defend. Similarly, I think it's arguable that China investing its export earnings into the USD may have been ultimately better for China's own growth because 1) unless the Chinese really start to ramp up domestic demand, it's unclear a shortage of capital is China's major problem, given much overcapacity 1) the U.S. at the time (and even today) is better able to deploy capital to truly innovative purposes. These innovations do not necessarily show up in any balance sheets (micro), but clearly they show up in GDP (macro) when the Chinese also benefit from these innovations without directly paying for them. Maybe it's only geeks such as me that have an appreciation for some of the simple things in our lives that aren't so simple. Think of the algorithms behind MP3s and web videos. Or the idea behind Facebook (Chinese copy: Xiaonei and Kaixingwang) and instant messaging (Chinese copy: QQ).

Look, I'll be the first to point out that the US economy has a lot of housekeeping to do right now. Excesses in the US also caused excesses in China. But let's just not forget that it takes two to create the two sides of an imbalance. If China and other Asian nations ran their own economies in a well balanced way that gives real opportunities to their citizens, they would not have had to depend on exporting to American consumers to grow their economies. Granted, young developing economies with no credit in the world need to do that and I’ll cut China some slack for that. But even Japan continues to depend on exports decades after its industrialization.