U.S., China United On Approach To Economy

All eyes will be on China-U.S. discussions as the G-20 forum approaches. One economist has characterized the powerful relationship as the ‘G-2 group’ that will lead the way to global economic recovery. From NPR:

When ranked by their purchasing power, the United States and China are the largest economies in the world, and the ties between them arguably make theirs the single most important economic relationship in the world today. For both governments, the global financial crisis has served to remind them of their deep interdependence.

[…]But this is a relationship with issues. Over the past few years, China’s exports have vastly exceeded its imports, leaving with a huge surplus. Much of that money has gone to buy debt — about $1.3 trillion worth. It’s partly those Chinese dollars that made U.S. mortgages so cheap — and led to the bubble that has now collapsed. It’s also that Chinese money that’s financing the current U.S. debt.

It’s a financial connection that is unnerving leaders of both countries.

The economic relationship is indeed fraught with tensions. Earlier today, Wen Jiabao has stated that he feels worried about the safety of China’s assets in U.S. treasuries. In addition, AFP has reported that the trade gap between China and the U.S. has expanded:

The weak global economy sent the US trade deficit to a six-year low in January amid plunging trade volumes, but the politically sensitive deficit with China widened, data showed Friday.

While the improvement in the trade balance appeared positive at face value, analysts noted the Commerce Department data revealed the troubles in economies around the world reeling from the most severe economic crisis since the 1930s.

“The key takeaway from January’s trade report is not that the deficit narrowed but that world trade activity continues to plunge,” said Nigel Gault at IHS Global Insight.

The still-expanding US trade chasm with China, by far its largest deficit, fired up critics who say Beijing keeps its yuan currency undervalued to make its exports unfairly cheap.

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