<$BlogRSDUrl$>

Monday, February 21, 2005

China, Guns and Money 

What's really on the agenda as President Bush sets off this week on his kiss-and-make-up tour to Brussels, Mainz and Bratislava? From Agence France-Presse:
US President George W. Bush is expected to use his visit to Europe this week to seek more support in his administration's bid to keep China's growing military might in check, analysts said . . . .

Washington and Tokyo also urged China "to improve transparency of its military affairs" in a joint statement Saturday amid concerns an EU plan to lift an arms embargo against Beijing could upset the region's military balance . . . .

By removing it, the US fears Beijing will have greater access to high-tech weapons systems that could be used to thwart any US intervention in the Taiwan issue, said Richard Fisher, deputy head of the Washington-based International Assessment and Strategy Center.

"As both Japan and the US begin to seriously prepare for a real war on the Taiwan Strait, it is simply sickening that European leaders are proposing to take any steps that would help to enable (China's) dictatorship kill (Taiwan's) democracy," Fisher told AFP.
Niall Ferguson in today's Guardian:
The biggest source of tension, however, may relate to China. The Europeans plan to lift the arms embargo imposed in 1989 after Tiananmen Square. The Americans oppose this, but their opposition is a symptom of a deeper suspicion of what Europe is up to in Asia.

It is not widely recognised that the US is currently being subsidised by foreign monetary authorities, mostly Asian. Central banks, led by the People's Bank of China, are financing about 75%-85% of the US current account deficit. In essence, the Chinese are buying dollars and US bonds to prevent their own currency appreciating against the dollar, which would in turn hurt exports.

N ot only are the returns on these dollar holdings miserably low, but as the US "twin deficits" grow, the exposure of China's central bank to a dollar devaluation grows. According to a recent estimate, if the yuan appreciated by 33% against the dollar, it would inflict a capital loss on the People's Bank equivalent to 10% of GDP.

From an American perspective, this arrangement is just fine. American consumption and foreign policy are effectively being paid for with low-interest loans from Asia, allowing the Bush administration to give American voters both butter (tax cuts) and guns (the occupation of Iraq). And economic interdependence notionally reduces the risk of Sino-American disagreements on strategic matters, notably North Korea but also Taiwan. Yet the Chinese must be feeling nervous. It clearly makes sense for them to reduce their economic dependence on the US export market and their exposure to the dollar.

Step forward Europe -already a bigger market than the US for Chinese goods and proud owner of the euro, a currency looking increasingly like an alternative reserve currency to the dollar.

| | Technorati Links | to Del.icio.us