China on Fiscal Cliff: U.S. “Kicked the Can”

Hong Kong’s benchmark stock index soared in the exchange’s first session of the new year on Wednesday, hitting a 19-month high as investors welcomed news that U.S. lawmakers had passed a deal to avert the so-called “fiscal cliff.” But after demanding on Tuesday that the U.S. “live up to its global economic responsibilities,” and claiming that the deadlocked talks had “exposed the deficiencies of the U.S. political system,” Xinhua News chided the world’s largest economy for only “kicking the can down the road:”

“At the moment there is a relief rally going on,” said Bernard Baumohl, chief global economist at the Economic Outlook Group and frequent guest on PBS’ Nightly Business Report.

“But I think now we’re going to have to deal with phase two of that poison pill,” he said, referring to cutting federal spending and the upcoming debt ceiling talks.

U.S. Congress has tied the economy to a bungee cord, he said. ” We jumped off the cliff temporarily on January 1st, then came the deal on taxes, so we came back up safely back on the cliff. But now we may go back off the cliff if there is no agreement on the spending side.”

Spending cuts are a highly incendiary topic for Democrats and Republicans. “They go right to the very core of the philosophical difference between the two parties,” he said, adding that he foresees a heated debate over the next two months on the issue.

On the Chinese blogosphere, meanwhile, Tea Leaf Nation’s David Wertime writes that netizens “approached the problem with a familiar mixture of humor and cynicism:”

[...]Across comment threads, many reacted as a majority of Americans have–decrying the faux crisis as a manufactured political “show,” a “performance by the two parties.” Perhaps most vividly, @羽林踏雪 declared it a “rotten Hollywood drama.”

Like any “rotten” performance, the fiscal cliff showdown seemed to Weibo users to lack suspense, with its resolution “just a matter of time.” @司徒柳桂 wrote, “It was always going to pass; the Americans always play out Hollywood plots where the lead is saved at the very last second.” @谢天添Narada added, “They are playing every time; eventually everyone gets sick of watching and doesn’t get anxious about it.”@一隅运筹 wrote, “I never thought they’d actually fall [off the cliff], although I wanted to see it. Haha.”

Indeed, a number of users simply laughed. @许泰毓不能服输 wrote he was “laughing so hard I’m speechless,” while @草莓奶茶爸 marveled, “People in the U.S. government are really laughable.”

But a twin strain of cynicism ran in the other direction, lambasting mainstream news outlets in China for focusing too much on America’s troubles, much as a far larger contingent of Web users had done after Chinese media appeared to downplay the school massacre at Guangshan in favor of reporting on the U.S. school massacre in Newtown, Connecticut just hours later.

“China can relax — for now,” writes Fudan University’s Shen Dingli for Foreign Policy. But given how intimately linked the Chinese and American economies have become, and given how much U.S. debt China has purchased over the years, Shen asks – “Is this any way to treat your banker?”

China helps the U.S. economy by lending money to the United States by buying Treasury bonds – it now holds $1.16 trillion of U.S. debt. U.S.-China cooperation has helped save the United States from financial insolvency — and China has benefited from this system by keeping its currency competitive — but this enablement has come with risks, including weakening the credibility of the U.S. dollar. To fundamentally improve its economy, the United States needs to stop the financial gimmicks and boost its exports the old-fashioned way, through innovation, while encouraging its citizens to increase their incomes and decrease their spending. China wants to partner with a healthy, balanced United States, not a profligate, irresponsible one.

And even if America’s day of reckoning has been postponed, China still faces the risk that the United States could fall off one fiscal cliff or another in the future. Without a fundamental restructuring of the U.S. budget that significantly raises income while cutting expenses, the United States looks like a disaster waiting to happen.

No wonder many Chinese see an America in decline, even if many Americans don’t believe it yet. We see few signs that the United States is ready to reinvent its national narrative and mission. But here in Shanghai, we understand basic math pretty well. The United States needs to balance its consumption and savings; weigh its pursuit of al Qaeda in Afghanistan with other foreign-policy goals; and cut its spending on defense and social welfare. How can Washington be responsible for the rest of the world if it can’t even take care of itself?

And while the Chinese media has lampooned the U.S. government for its fiscal charade, former Treasury Department official David Loevinger and other economists told Reuters on Thursday that the world’s second largest economy has its own fish to fry:

“If China tries to sustain growth by adding debt and investing it inefficiently it will be like cotton candy: a short-term high with no lasting value,” said Loevinger, now an Asia analyst in Los Angeles at TCW Group Inc., which oversees about $135 billion. “The U.S. got into trouble because institutions like Fannie Mae (FNMA) and Freddie Mac were too big to fail and had a toxic mix of private shareholders and implicit government guarantees. China’s financial system is full of Freddies and Fannies.”

Xi and his team are inheriting an economy more leveraged than the one President Hu Jintao took over in 2003. Government, corporate and consumer debt rose last year by 15 percentage points to an estimated 206 percent of GDP, Standard Chartered said in a November report. In March 2003 it stood at 150 percent.

Borrowers are using some new loans to “plaster over non- performing credits” while so-called shadow banking is growing too fast, said economists led by Stephen Green. They estimated that a bad-loan ratio of 12 percent would erase the banking industry’s 7.5 trillion yuan ($1.2 trillion) in capital.

Citing Loevinger’s comments, however, Did Kirsten Tatlow of The New York Times points out a key difference between China and America’s debt situations: “China’s risk is mostly domestic, with its holdings in U.S. debt carried by the Ministry of Finance and the state banks it runs, unlike the U.S.’s debt, which is held by parties around the world.”