Beijing Losing Sleep Over America's Fiscal 'Crisis'

By Stan Abrams

I have to assume that a lot of government officials here didn’t get a lot of rest of late. There are really only three big news stories floating around, and while they vary in relevance with respect to Chinese politics, none of it is exactly good news.

First, there was a massive train wreck near Wenzhou. I don’t really do disaster coverage on this blog, so I’ll just point you towards the Google machine. You can start with Charlie Custer’s coverage of the story in ChinaGeeks. Not only is this a tragic story, involving at last count 35 deaths, but we’ve already got the usual finger pointing, rumors of government scandal and mismanagement, and calls for rail transport officials to be sacked. This one ain’t going away anytime soon.

Second topic, although of much less direct significance to China, is the terrorist attacks in Norway. Anytime there is a major incident involving domestic terrorism, you can bet that security officials here in China are dusting off their playbooks and wondering whether they’ve done enough to prevent that sort of thing from happening here. If I’m a high-level security official here, I’d be calling my deputies and asking for a briefing entitled “What China is doing to prevent a ‘lone terrorist’ scenario.”

Third, and in my opinion by far the biggest issue on the minds of the government, is the American fiscal ‘crisis.’ While the train wreck in Wenzhou is a huge media story, the slow-motion train wreck in D.C. is much more significant in the long run. At this point, even if the sellouts Democrats and the anarchists Republicans cut a last-minute deal, there’s a good chance that the ratings agencies are going to downgrade U.S. bonds anyway.

Automatically, China’s huge dollar investments are not as safe a bet as originally envisioned. But that’s only one problem.

Deal or no deal in the next few days, the general consensus is that the U.S. will not fail to make interest payments on its debt. It has enough revenue coming in to cover these obligations, after all, so that doomsday scenario appears quite unlikely to occur.

On the other hand, the best-case scenarios look pretty crappy too. A deal between America’s two dysfunctional political parties would involve steep spending cuts to discretionary and entitlement programs. Although I’m sure China would like to see the U.S. put this whole issue to bed once and for all, I doubt that Chinese economists will be jumping for joy at this kind of austerity package.

Why? Basic macroeconomics. Remember Econ 101 when we all learned that GDP = C + I + G + NX? This is the sum total of what a country produces, a combination of investment, private consumption, net exports, and government expenditures.

In the U.S. right now, investment is anemic, private consumption is in the toilet, and the country obviously has a trade deficit. So no help there with growth. What’s left to pick up the slack? Government spending. The U.S. economy is slow and unemployment is high; this is the time when government spending has to be stepped up until the situation improves. At least, that’s what sane policy makers would advocate.

The U.S. is one of China’s most significant overseas markets, and it is therefore quite concerned with how the U.S. manages growth. If the U.S. stops buying Chinese products (remember 2008/9?), then China’s manufacturing sector takes a hit, a lot of folks lose their jobs, and once again, China’s domestic security apparatus is worriedly looking over its shoulder.

So if the best-case scenario has the U.S. government cutting spending, in other words guaranteeing a further slowdown in GDP, Beijing can’t be too happy. On the one hand, China wants U.S. fiscal stability and reassurance that its dollar assets are safe, but on the other hand, China’s economy is still reliant on the U.S. export market. Tough situation.

While the security guys and the propaganda folks have their eyes on Wenzhou and Norway this weekend, I have the feeling that the higher ups are tuning in to CNN’s debt ceiling updates on last-minute White House arm-twisting sessions with members of Congress.

We’ll know a lot more over the next few days. In the meantime, it’s kind of depressing out there.

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor. Stan has an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, and a B.A. from Pomona College. He blogs at China Hearsay.

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