Several election cycles ago, there was a Washington flap over whether or not China was a "strategic partner" of the United States. Echoing old racist language, National Review labelled the Clinton administration's self-characterization of its China policy, "inscrutable." By the time of 2000 US presidential election campaign, candidate George W. Bush rejected the idea of a partnership, framing China instead as a competitor. In a matter of months, with Bush now at the helm of the American government, China and the US were taken to the brink of confrontation over the downing of a US airplane allegedly in Chinese airspace. That was then!
US-Chinese state-to-state relations have been incredibly stable since then. Despite tensions over the Iraq War and other sites of international conflict (e.g. Darfur), China's investment in the United States has increased radically: it now owns $407 billion in US public debt as part of its $1.3 trillion foreign currency reserves. The exact composition of these reserves is not known, but some estimate dollars make up about 70% of it. One way to think of these numbers is to compare it to the total final value of goods and services produced in the US: $13 trillion in 2006. So, China has cash that could buy up 10% of the US economy!
Although peace movement thinkers wondered whether or not US creditors would use their power to limit US warmaking, China seems to have been a quiet enabler of the war in Iraq. Conservative nationalist, Paul Craig Roberts puts it starkly: "If China ceased to buy US Treasuries, Bush’s wars would end..."
But China's unwillingness to use its financial power to thwart Washington military activities does not equal passivity. So it was that policymakers and pundits were thrown into a tizzy when 2 Chinese thinkers noted that China is in a position to use its reserves to counter US pressures to increase the value of the Yuan. Writing in CounterPunch.org, Paul Craig Roberts sounded the alarm ("In the hole to China" 8/8/07) and then 2 days later, noted the Washington reaction: a putative move by China to sell off its dollar holdings would be self-defeating (i.e. China's holdings would also lose value).
While there is a great deal of truth to the last argument, Roberts correctly notes that foreign reserves holdings are not as important to China as it is to most other economies (it has a positive balance of trade; it has a growing internal market, etc.). It is likely that the China will slowly divest itself of much of its US holdings contributing therewith to the long-term decline of the dollar. Without Chinese support for its multiple deficits, it will be interesting to see how the US responds to the resulting economic austerity which, by the way, it has imposed on so many other economies.
