I know I am a little late in commenting on Secretary Yellen’s trip to China. This happened in the summer. Due to so many obligations, I was behind my writing. Here is my take on US Treasury Secretary’s trip to China.
“Nixon to China” is a famous saying where then President Richard Nixon flew to Beijing which started the normalization of US - China relationship. This relationship has now become the world’s most important relationship. High-profile leaders from both sides have been visiting each others’ capitals and have been engaged in high-level dialogue for years to stabilize this very important relationship. Now, it’s Treasury Secretary Janet Yellen’s turn to visit Beijing.
After Secretary of State Anthony Blinken visited Beijing, Secretary Yellen is now visiting Beijing and meeting with key stakeholders. But this is not Nixon’s China.
When President Nixon visited China, China was an agrarian, poor, and backward economy. But it’s not Nixon’s China anymore. As I have written before, China now is near pear to the United States. In some ways, China is ahead of the United States in many areas. It’s a different China and Yellen’s trip is definitely not Nixon’s trip. So why did Yellen travel to China?
It’s simple, America needs money. The US, thanks to out of control spending, has racked up massive amounts of debt. Thanks to financialization and abandoning manufacturing, the economy is levered to the tilt and driven by credit. We have already seen what a few notches of rate increases have done to the US banking system. But would China bail out the US this time?
What many don’t know is the fact that it was not the “brilliance” of the US Treasury and TARP that saved the US economy. But in reality, the Fed printed trillions of dollars to save the global banks and if it weren’t for cash rich China (which makes actual things people need and exports these things for cold hard cash) did not crank up their US Treasury buying, the US and global economy would have been toast. Basically, Beijing bailed out Wall Street, and saved the US economy. Will Beijing do the same this time?
It’s no secret that the US - China relationship is at an all-time low. The relationship between the current superpower and up and coming superpower is at an all-time low since relations were normalized in 1979. So would China save the US this time?
Since Obama’s pivot to Asia, US has had an aggressive stance on China. This has worsened since Trump’s trade war. It has gotten even worse during Biden’s tenure. Some of these aggressive stances include US Navy patrolling excessively in the South China Sea, tariffs on Chinese exports, detaining Huawei CFO Meng Wanzhou, sanctions on Chinese tech companies like Huawei, and now the Chip Ban. As I have written before, as Washington targets China’s tech ambitions, Beijing has its eyes on the PetroDollar. Beijing knows that it is at war with Washington, so why would it bail out its main adversary?
It is not just geopolitical. China does not have much of a macro incentive to invest in US Treasuries. It used to be that many of China’s excess reserves would go into US Treasuries. But with QE, money printing, and seeing their dollar holdings decline in value, China pivoted to investing in hard assets like commodities, energy, and infrastructure. This is one of many reasons Xi Jinping started the Belt and Road initiative. Outside of the BRI, China is increasingly internationalizing the Chinese Yuan. With Yuan being used more than Dollars for China’s bilateral trade and China making commodity producers use the Yuan instead of Dollars, why would China have any incentive to hold US Treasuries?
Last but not least, the Chinese are not naive. They saw what happend to Russia’s FX reserves when Russia invaded Ukraine. If tensions were to rise and China were to go to war with the US in the South China sea, Beijing already knows that Washington will freeze China’s Dollar holdings. So again I ask, why would China fund the US economy?
There’s maybe a contrarian reason. Since 1971 and the end of the gold standard, Nixon and Kissinger’s PetroDollar deal demand for US Treasuries (USTs) skyrocketed. Every country needed oil, thus needed Dollars, and parked their global excess reserves into US Treasuries. This PetroDollar system meant that the US had to export Dollars, thus offshore its manufacturing. This gave the opportunity for Wall Street to focus on short-term profits and financialize the US economy. Financial bubbles replaced building real things. Demand for Treasuries combined with the financialization of the US economy (expanded by the Fed’s money printing) gave us the world’s largest bond bubble. This, with the Reagan and Thatcher neoliberal revolution, Wall Street took over Main Street. By offshoring America’s manufacturing and forcing the world to trade with Dollars and put money into USTs, the world gave America deflation. This gave Wall Street ample opportunities to financialize everything from mortgages, student loans, to actual homes. This also gave Washington the excuse to go trillions of dollars in debt. But as China’s demand for US debt helped Wall Street, Washington, and Silicon Valley, it hurt the rest of the country. America deindustrialized which not hurt the American Middle Class but it has also negatively affected America’s industrial capabilities. Already America is struggling to onshore Chip manufacturing, where majority of its advanced chips are manufactured in Taiwan. During the COVID-19 pandemic, the US could not manufacture masks and PPE. Even during the Ukraine - Russia war, the US is running out of ammunition and is struggling to boost production.
In the meantime, China has become a manufacturing powerhouse. China’s steel production is 10x the US steel production. China has beaten Japan to be the number one car exporter in the world. Even in the world of defense, the US Secretary of the Navy had to be humble and admit that one Chinese ship yard could build more Navy ships than the entire number of ship yards used by the US Navy. Thus, financialization of the US economy has given China a huge industrial and technological advantage thanks to offshoring and knowledge sharing. So China might continue to buy US Treasuries, because this will reduce rates (increasing demand for USTs) and further financialize the US economy. This will make China much stronger and China gets more money for its ambitious projects, which include building up its military and the BRI.
Then again, what I said above is just me playing devil’s advocate. In 2008, China had two main reasons to save the US bond market and economy. At the time, the US was China’s main customer. Also, China was not as technologically advanced as it is today. The country had a lot to gain from a steady US-China relationship. But today’s China is much different than what it was in 2008. China is dominant in many tech sectors, which include AI, e-commerce, FinTech, 5G, infrastructure, and EVs. Also, China has shifted most of its trade to the global south, which is the global majority. With all this talk about de-coupling and de-risking, it seems like China needs the US less and less as years go by. So would Beijing bail out Washington again?
I will also end this essay with this point. While China is building its exports to the global south, increasing consumption domestically, and going up the technology value chain, the US needs Taylor Swift to boost its economy. Speaks volumes.