Written by Laurence Brahm - Published by South China Morning Post on 09/09/2009
In China’s diplomatic language, the term “old friend” (lao pengyou) is used often. In the good old innocent days of Sino-US relations, old friends meant people like president Richard Nixon and his then-national security adviser Henry Kissinger, who opened the door to China. Last year, former president George W. Bush was praised as an old friend for his unflinching resolve to attend the opening ceremony of the Beijing Olympics.These old stalwarts stand in contrast to the likes of French President Nicolas Sarkozy, who wavered over attending the Games, and German Chancellor Angela Merkel, who has dared to question China’s human rights record.
So, how friendly will US President Barack Obama be viewed, in Beijing’s eyes, when he makes his first state visit to China in November? Obama could be given the title “old friend” even though he has been in office for less than a year. Unlike his predecessors, Obama is not in a position to offer favours or face. Rather, he is a friend in need – big need, in fact – because he has to finance Washington’s US$1.75 trillion deficit. Beijing is the only one who can afford to do so. That means Washington must play soft with Beijing. Obama’s advisers are likely to suggest that he
should pretend the dragon is a panda, and cuddle it.
There are good reasons for this. In June, the US Treasury Department got the jitters when China sharply cut its US Treasury bill purchases by US$25.1billion. China-held US Treasury assets suddenly dropped from US$800 billion in May to US$776.4 billion in June – the largest reduction in nine years. Thus began much speculation in Washington about the motivation behind the move.
Many feared it was politically motivated. China’s sharp reduction ran against the market trend. In the same period, Japan increased its Treasury bill purchases by US$34.6 billion, while Britain bought a bullish US$77.2 billion – both friends indeed. So, US analysts had reason to wonder why China would move so suddenly against such a trend. Is Beijing asserting its global geopolitical prerogatives with its newly found financial and economic clout? That is how some read it.
Beijing claims there is no ulterior political motive; just classic Chinese pragmatism and business as usual.China calls its recent reduction in treasuries “a regular adjustment”. Some see it simply as diversification.
For years, the established pattern has been that, every month, China leads in the purchase of US Treasury bills, followed by Japan, Britain and Russia. That pattern was first disrupted in the wake of Wall Street’s meltdown last September. Beijing shifted from longterm corporate and institutional paper to short-term treasuries, a move seen by some analysts as positioning for a fire sale. Beijing gave Washington the jitters again when it reduced its Treasury bill purchases in April, by US$4.4 billion, which it also said was a market adjustment. The White House sighed with relief when Beijing’s purchases shot back up again in May.
Officially, China has adopted “three principles” for managing its US$2.13 trillion in foreign exchange reserves: liquidity, security and yield. These principles are repeated like a mantra from Vice-Premier Wang Qishan and central banker Zhou Xiaochuan, to the foreign-exchange traders themselves. So, as much as Beijing may want to diversify, it doesn’t have much choice. On average, US Treasury bills yield 1-2 percentage points more than European ones. China will continue to buy them, for now.
Consequently, US relations with China have entered a new era. Diplomatic visits by both US Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner have been perceived more as investment portfolio management roadshows. During their meetings, both quoted ancient Chinese proverbs to help schmooze Beijing into debt financing America’s recovery. So, when Obama visits Beijing, he should not be surprised if he is greeted with an ancient western proverb: a friend in need is a friend indeed. Now let’s see what friendship is all about.
Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.
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