China, the United States and the World

In the economic turmoil that the world has faced, the Chinese economy has probably weathered it much better than most. It is widely expected that China will have an 8%+ rise in GDP this year, while economies around the world are contracting, remaining stable at a negative number or growing sluggishly. There are no indications that a V recovery will be occurring in any other than China.

Having recently visited China in the summer of 2009, I can tell you that what they say is true…the national bird of China is seemingly the crane…as in construction crane. I had spent time in both Beijing and Shanghai, and the amount of construction work being done is astounding. In Shanghai, the upcoming World Expo is resulting in projects for as far as the eye can see, along with the displacement of those living in areas necessary for construction. The United States, among other countries, is a beneficiary of all of the work.

Beyond economic considerations, the United States has an uneasy alliance with China for a variety of reasons. Not the least of these is the fact that China is the largest buyer of U.S. Government debt, and is therefore a major component in our deficit spending. Ironically, China which is a capitalist/communist blend, is so important to the United States when not that recently it did not have established diplomatic relations with us. Without China participating in our auctions, borrowing costs would increase substantially, creating even more of a burden for our fragile economy and therefore our government deficits. On the flip side, if China ever decided to dump or sell the treasuries it already owns, it could have a devastating impact on our markets and our ability to sell new securities at reasonable rates.

China is also a key player in international policy, and its relationship with Iran has the potential to put the United States and them at serious odds. China depends on Iran for a good deal of its’ imported oil which is a major cog in maintaining it high growth rate. To support diplomatic or economic sanctions against Iran would not be in China’s best interest, yet the result of having a nuclear-armed Iran would not be either. As a result, the United States is being forced to tip toe around China in order to maintain the fine balance between national security and economic stability that we so desperately require.

The Obama administration has to decide what stance it will take when dealing with China. Will it be a hard stance on the subject of Iran, or more benign so as not to have an adverse impact our economy. Stay tuned.