US and China are set in spending and saving habits
Alistair Darling has played host to the world’s most important money men (and women) a few times already this year, most recently in his native Scotland, but he might be forgiven for feeling a bit envious as the world looks to where the really important decisions are being made this week: at the Singapore meeting of the Asia-Pacific Economic Co-Operation Group.
President Barack Obama has time-tabled his Asia swing-tour to coincide with the meeting and grab some time with China’s President Hu Jintao. What will they talk about? Not much, really, apart from the future of the global financial system and the free market economy.
The two nations trade just shy of half a trillion dollars worth of stuff each year. But here’s the rub: China sells about five times more stuff to the US than the Americans can pawn-off to the Chinese. This creates two “major” headaches: Firstly, China sits atop a mountain of US dollars (in the form of US Treasury bonds and actual greenbacks) that some suggest is worth more than $2 trillion. And those dollars are getting cheaper by the day as investors seek higher returns than the near-zero interest rates on offer from Ben Bernanke’s Federal Reserve. China says the sliding greenback – and the corresponding rise in dollar-priced commodities like oil and gold – is a global concern the US must address.
The US claims China’s currency, the yuan, is artificially cheap thanks to the government’s intervention making its exports unfairly attractive.
For whatever reason, China’s not prepared to let domestic demand dictate its growth. APEC members are feeling the same way: they’re economies that know and understand exports, but aren’t comfortable with domestic growth. So they keep their currencies cheap though the purchase of US Treasuries.
This eases the burden of funding the United States’ near $1.7 trillion deficit, but it’s bad news for the so-called “global imbalances” (a fancy term for the fact that Asian nations save and Western ones spend) that partially ignited the credit crisis.
Changing those spending and saving habits could take a generation. Meanwhile, the imbalances grow larger, investors take cheap stimulus cash and buy higher-returning assets and commodity prices will continue to rise. Many wonder how long this can last before the next bubble busts.
Maybe Mr. Darling is secretly relieved that he’s back home dealing with bankers’ pay rather than refereeing a dispute of this magnitude.
Martin Baccardax is On-Air Economics Editor at CNBC and co-host of Closing Bell and Europe Tonight