In it together

China/US: China’s diatribe against Washington’s economic policy after the weekend’s US credit-rating downgrade could backfire. Pouncing on overseas woes may be an attempt to shift domestic attention from China’s recent train tragedy. But, the cost for Beijing could be more US pressure on matters like currency and Sino-American trade.

The news service, commonly seen as the Communist Party’s mouthpiece, made two demands after Standard and Poor’s stripped the United States of its triple-A status.

First, it called for international supervision of US debt and for China to be given certain guarantees on its exposure. This is largely familiar stuff. But the second request, for America to slash its military expenditure to help balance its massive budget gap, marked a new departure. It reflects concern after the recent US military drills in disputed waters of the South China Sea, and worry about more US arms sales to Taiwan, a topic expected to emerge during Vice President Joe Biden’s upcoming visit to China. Of course, it suits China to talk down the United States. With the yuan only allowed to appreciate slowly against the dollar, there are trade advantages of a weak dollar for China, though slower demand from the United States will eventually hurt Chinese exports. China’s tightly managed currency regime is one reason why the US-China trade imbalance rose 20 per cent to $273 billion in 2010. With worries about global recovery spiking, Beijing will be more inclined to keep its currency in check to help exports.

But, Beijing’s warnings lack teeth. China is the biggest foreign owner of US Treasuries and it has no choice but to keep buying. There is no other market deep enough to park a majority of its $3.2 trillion of reserves. Chinese authorities will hope in vain that Washington will listen to its concerns on military spending.

But, dictation of US military policy by Chinese media will give fodder to those politicians on Capitol Hill who would like to portray China as a threat to America’s security. Lawmakers could respond with proposed trade sanctions and louder criticism for the inflexible yuan. With so much at stake for China, Beijing needs to choose its words carefully.