[Author’s note: To make this blog easier to read, I’m going to start putting links to sources and articles in indicated words and phrases throughout my blog posts instead of simply putting in the entire URL. I have made it so that these will open in new tabs upon clicking, so you can refer to both this blog and the articles I’ve linked without interruption. –Danya]
Let’s talk about one of my favorite countries of study in international relations: China.
China is one of my favorite countries to study for so many reasons: historical, political, cultural, linguistic. From an international relations standpoint, China is a fascinating study because it is unique.
I wrote my undergraduate thesis on controversial topics in contemporary Chinese foreign policy. I’m not an “expert”, per se, but I can definitely say I know something. I at least know enough that I have been able to establish an opinion well-grounded in and backed by evidence.
I’ve noticed a lot of smack-talk among the U.S. presidential candidates about China’s holding of U.S. public debt. Romney criticizes Obama for the amount that China holds in U.S. debt. (For more details, visit this page on the usa.gov website.) For the record, China has held much of our debt since long before Obama was ever in office.) Obama criticizes Romney for taking away jobs from Americans by exporting jobs to China, as well as other countries like Mexico, when Romney was the head of Bain Capital. I’ve heard a similar kind of talk about Russia, especially from Romney and his running partner for vice president, Paul Ryan. It annoys me to hear such talk of both countries because I find it is done excessively, obnoxiously, and non-diplomatically, though I won’t deny there are legitimate criticisms.
I’m going to attempt to clarify in today’s post what that’s all about and to what degree their concerns are valid. I’ll start by talking about the roots of U.S. Sinophobia and follow it up with an explanation on what it means to owe China for both the U.S. and China.
Roots of Sinophobia
There have been a lot of studies done on the effects of China’s holdings, because China is currently the largest foreign holder of U.S. debt at about $1.2 trillion (see here for a list of foreign holdings as of January 2012). That’s slightly more than the debt owned by U.S. citizens, which is just under $1 trillion. It’s said that Japan will soon overtake China, but even so, the fact that we owe China so much is a big deal.
But why?
There are quite a few reasons. One is that China has the second largest economy in the world; it will not be long before it overtakes the U.S. This is terrifying to many who work in the U.S. federal government, as it will indicate a loss of an economic edge and therefore power.
Another is that China is not considered to have a true democracy. It has elections, but considering that China is a one-party state, that doesn’t mean too much. But I will argue that China is communist in name only. Entire books have been written on this subject, but to summarize: Under Deng Xiaoping in the 1990s, especially after the fall of the Soviet Union, China transitioned to a more capitalist economy, although there is no question it is still at least semi-managed. Communist regimes have managed economies, meaning that the government has strict control over the distribution of resources. Enough people are living in the U.S. that grew up during the Cold War that there is still a dislike and fear of communism.
In my thesis, I argued that China doesn’t abide by international expectations as formed by current international laws and standards; it seeks to fulfill its foreign policy aims—which largely related to China’s development—by not playing by the rules. What is frustrating for many is that these methods of avoiding the rules have proven to be effective for China’s economic development and growth. The dominant school of development is neoclassical in nature; China does not follow these edicts. A good way to get a sense of what neoclassical development looks like is to read the Washington Consensus, written in 1989 as a standard guide for developing countries. My economic development professor was a heterodox economist, so my view of neoclassical approaches to development is rather negative, but the evidence out there indicates that neoclassical approaches are not very effective or useful. “One-size-fits-all” approaches rarely are.
Yet another reason is the debate surrounding the value of China’s currency, the yuan or the renminbi (RMB). (I’ll stick with yuan, it’s shorter.) Many proclaim that China’s currency is undervalued. You might be wondering, “What the hell does that mean?” China’s currency, in the past, was strictly “pegged” to the U.S. dollar; today it is different, as I’ll explain in the paragraph after this one. That is, the yuan’s value was always kept to a certain conversion rate, a little more than 8 yuan to the dollar. This is called a pegged or managed currency regime. Such currency regimes can be good in preventing price and currency value shocks. However, it also means that monetary policy is very limited, as the Chinese Central Bank must maintain the yuan’s value by reducing or increasing the money supply as dictated by fluctuations in the dollar. (Quick Lesson in Monetary Policy 101: Assume you are the Central Bank of China. You must maintain yuan’s value relative to the dollar by adjusting the domestic money supply–that is, the amount of yuan in circulation. If the dollar’s value increases, you must maintain the value of the yuan by shrinking the money supply so that the value of the yuan increases with it, maintaining the status quo. Think of it this way: the less yuan available, the more valuable it is.) Okay, so what? “So what” is that when you keep your currency artificially low, it can cause a few problems. For one, it is considered giving yourself an unfair advantage in international trade, because it means your products cost less; for example, when the yuan’s value was 8 yuan to the dollar, a 24 yuan item would cost $3, which is considered “cheaper” because it takes less dollars to purchase that item. This is called “purchasing power”. (See why so many things are made in China?) Another problem is that the lower value has a negative impact on domestic economic activity, because it means things are more expensive at home.
Another thing to keep in mind is that the yuan no longer has a “hard” peg. It has changed into what is called a “crawling peg”, which means that the yuan is allowed to float within a certain value band compared to the dollar determined by the Central Bank of China; the yuan’s value is not allowed to fall or rise beyond that range. It is a hybrid currency regime that is known as a “managed float”. This gives the Chinese government a little more flexibility in monetary policy but at the same time continue to have the benefits of a pegged currency.
A lot of studies conducted by economists have shown that the yuan is either at approximately the right value or not as grossly undervalued as many policymakers claim. The differences in these conclusions depend on the methods by which the results were attained (there are many theories and approaches to the study of currency value) and the availability of verifiable, accurate data—if data is available at all. (I can tell you from personal experience that finding data, let alone good data, is usually a very large problem for those who study anything related to contemporary China.) A couple have even argued that the yuan is in fact overvalued and while parts of their argument are valid, their analysis is generally based on the level of reserves possessed by the Chinese government and, in my mind, leaves out a lot of other relevant factors.
With all of these combined, there is a strong Sinophobic sentiment among many American policymakers, some of whom have influenced American voters to think in a similar vein. The bottom line is this. They are afraid of China because China has shown time and again that they are capable and willing to break the rules to get what they want—and they often successfully get away with it with little reproach, though not always. Think back to the blog post I made about hard and soft power. China is a significant wielder of hard power—that is, economic power—and they have proven that they can use it effectively. People tend to put more value into the tangible, so for them, China has both bark and bite.
What owing China means for both parties
The fact that American policymakers have been putting a large egocentric focus on the problems caused by China’s enormous holdings of U.S. debt makes people forget that it goes two ways. China does not go unaffected. But how does it affect both the U.S. and China? And what implications do these effects have?
I agree that it isn’t good, in the long term, to have such a high debt. The burden gets passed from generation to generation and puts a drain on the economy. This is for any and every country, not just the U.S. (Has anyone been paying attention to what’s happening in Greece? If not, I suggest you look it up. Or perhaps I will do a future blog post on it after some upcoming events. But until then, read this and this. And while you’re at it, this. The resolution of the Greek issue going to be important in determining the future of the European Union.)
The main concern for many U.S. policymakers is that China’s debt holdings will allow it to have an “edge” over the U.S., allowing them to more easily get what they want in their dealings with the U.S. This perceived edge comes from the belief that China could cash in on large amounts of debt and crash the value of the dollar.
As someone who has studied this area of Chinese foreign policy, however, my opinion is that this does not have much merit, though that is not to say there is no foundation for this fear. Fear of foreign creditors is not by any means a contemporary phenomenon; it dates back to ancient times.
A fantastic 2009 article was published in the academic journal International Security by Daniel Drezner surveying the validity of the fears that China will have greater influence due to oversize holdings of U.S. debt. His opinion can be summarized in two sentences taken directly from the introduction of the article: “To paraphrase John Maynard Keynes, when the United States owes China tens of billions, that is America’s problem. When it owes trillions, that is China’s problem.” This is a 40+ page-long article, so I’ll give you some of the highlights. Drezner comes to the conclusion that China as a foreign creditor has not been able to translate its capital gains into major foreign policy gains; most of the gains made are rather minor. There are several reasons behind this, mainly that financial leverage is extremely limited in great power politics since the creditor and debtor, being great powers, will have similar vulnerabilities, if indeed they have any; there is therefore a low cost of retaliation should the creditor attempt to coerce the debtor into committing to a foreign policy action that the debtor doesn’t necessarily want. Another reason is that there are always other sources of credit; China is hardly the only country the U.S. could attain credit from.
It would be a stupid move on China’s part to pull the plug on offering credit to the U.S. This is the when-the-U.S.-holds-trillions-it-is-China’s-problem part of Drezner’s conclusion. There are several reasons for this. The first is that China, as a creditor with its currency effectively pegged to the U.S. dollar, would not want to cash in on what the U.S. owes it precisely because the dollar would crash. China cashing in on U.S. debt would lower the dollar’s value because the demand for the dollar has decreased; the dollar’s value (think of it as the “price” of the dollar) is determined by supply and demand, just like the price of any other item. When a country holds another’s country’s debt, the debt is usually denominated in the debtor country’s currency. In this case, China holds U.S. debt in U.S. dollars—not in yuan. So yes, policymakers are right that such a move on China’s part would devalue the dollar, but they are wrong that it would be an action of any worth or benefit to China. It is not as much of a deal if China decided to lower its holding by smaller amounts, but large amounts (in the hundreds of billions, for example) would probably end in disaster for both countries.
You might be asking, “But wouldn’t China want to have a lower currency value? Didn’t you just write that China is keeping its currency’s value low for exports and all that?”
Of course I wrote that. It is definitely true; I’m not coming back to tell you any different. But in this case, the answer is a definitive no, even in accordance with what I told you. Although China is keeping its currency relatively low to capitalize on the advantage of cheaper exports, a currency that is too low is extremely problematic. China knows it and would never let the yuan crash to such levels. Let me use an example of inflation as an illustration, because inflation, while it isn’t (completely) what determines the exchange rate between currencies, it is a measure of a currency’s value at home. In the immediate aftermath of World War II, Hungary’s currency at the time, the pengő, experienced rampant hyperinflation—to the point where it cost millions of pengő to buy a loaf of bread; the Communist Party replaced the pengő with Hungary’s original currency, the forint. True, this is an extreme example. But it gets my message across: The moral of the story is that if your currency is too low in value, it is much harder to have a thriving economy at home (in Hungary’s case, completely impossible), let alone do well enough to be able to export. (The reverse is also true: it is not necessarily good for a country to have a currency which has a value that is too high, because it would mean that its exports are too expensive for others to purchase.)
As I said earlier, China’s ownership of U.S. debt is a problem with effects that go two ways. The U.S. has the problem of paying off its debt to China in a timely but responsible manner; China has the problem of holding such a large amount of U.S. debt that disengagement, should it be so desired or necessary, will be difficult without causing currency shocks.
Implications of Sinophobia
While smack-talking China is nothing new for U.S. elected officials, it is something that I find tasteless. I was annoyed with Paul Ryan talking about Syria during the vice presidential debate last week and him constantly bringing up Russia when it was not even closely related to the point he was supposedly trying to make. I see no good coming out of discourse such as that. Sure, it’s an easy rallying point around which support can be gathered. Throw in spices of truth into the broth of lies and everyone will automatically assume its a truth broth, simply because there is truth in it. Propoganda seems to play on defining perceptions to be black and white: concepts of good and evil, right and wrong, fair and unfair, true and false. It is meant to encourage you to be part of and/or lend support to a team, a group, an organization, or a country dedicated to a cause.
Here’s what can be so dangerous about such talk. If citizens are convinced that even part of what their elected officials say is the truth—maybe it is validated by the media, for example—they are more inclined to believe anything else these officials say. But we are human. No one ever always lies, but no one ever always tells the truth, either. And people forget that. We citizens are often in awe of these officials who have come so far and done so much. Even if we don’t like them or don’t agree with them, we are in awe of them, one way or another. (Of course, it might be awe that they are an incompetent person who has made it so far, but because they have done so, they are nevertheless raised to an elite status.) So if citizens take their leaders’ words as gospel truth, they are not going to look for additional information elsewhere. They believe they know the truth and are therefore themselves informed. Psychological studies have shown time and again that even when presented with evidence that clearly contradicts a long-held belief, individuals will hold on to those beliefs regardless.
Do you see where I am going with this?
That is what makes propoganda so effective. When you come to believe something is true, it is hard to change your views to be in accordance with the evidence that proves otherwise. Propoganda plants those psychological seeds.
So the more that U.S. politicians talk badly about China, the less people will be inclined to see any good in China. Combine this with the fact that we humans tend to judge the people of a country by its government—if you don’t believe me, go abroad and talk to people and you will learn very quickly that this is the truth—and the U.S. will have even more obstacles in dealing with China, because there will be an instilled unwillingness on the part of the U.S. to understand since the U.S. believes that they already understand. Is this phenomenon conscious? Chances are it’s not (unless you’re determined to hate others). Nevertheless, it contributes to the Sinophobia that underlies the attitude of many—certainly not all—Americans.
My obligatory disclaiamer: Please remember, I am talking about generalities here. I’m not saying this is the effect that happens to every single American. (Obviously not…I wouldn’t be writing this, would I?) But at the same time, this is something that does actually happen. If you look in history, there are many examples of widespread hatred based on misinformation and misunderstanding. (World War II concentration camps, anyone?)
My point is that Sinophobia only serves to hinder relations. It does not help or change anything for the better. I think we need to step up and try to understand China. That doesn’t mean we have to agree with everything we do. (Oppression and social control are things that shouldn’t be taken lightly.) But don’t vilify the country for every little thing that it does. And to U.S. policymakers: do you remember whose fault is it that we have so much debt in the first place? That’s right. It’s ours. If we didn’t have so much overall debt in the first place, China wouldn’t have so much debt of ours to hold…
Breaking the Chaos in the New World Order 