For weeks the world has eagerly awaited word from the Obama transition team about the people who will head up the next administration -- the new secretaries of state and treasury, the attorney general. But one of the more crucial positions in the Obama administration probably isn't going to be filled for months and is likely to get little attention when it is -- the post of U.S. ambassador to China.
China has become the key to America getting through the worsening economic crisis. The American ambassador in Beijing (okay, this is a metaphor for all those officials who will be managing this relationship) will need to make sure that China sees its interests as aligned with America's. Or else things could get very, very ugly.
Everyone agrees now that Washington needs to spend its way out of this recession, to ensure that it doesn't turn into a depression. Economists on both the left and right agree that a massive fiscal stimulus is needed and that for now, we shouldn't be worrying about deficits. But to run up these deficits -- which could total somewhere between $1 trillion and $1.5 trillion, or between 7 and 11 percent of gross domestic product -- America has to get someone to buy its debt. And the only country with the cash to do so is China.
In September, Beijing became America's largest foreign creditor, surpassing Japan, which no longer buys large amounts of Treasury notes. In fact, though the Treasury Department does not keep records of American bondholders, it is virtually certain that, holding 10 percent of all U.S. public debt, the government of the People's Republic of China has become Washington's largest creditor, foreign or domestic. It is America's banker.
But will the Chinese continue to play this role? They have the means to do so. China's foreign exchange reserves stand at about $2 trillion (compared with America's relatively puny $73 billion). But the Chinese government is worried that its own economy is slowing down sharply, as Americans and Europeans stop buying Chinese exports. It hopes to revive growth in China (to levels around 6 or 7 percent rather than last year's 12 percent) with a massive stimulus program of its own.
The spending initiatives that Beijing announced a few weeks ago would total almost $600 billion (some of which include existing projects), a staggering 15 percent of China's GDP. Given its focus on keeping people employed and minimizing strikes and protests, Beijing will not hesitate to add tens of billions more to that package if need be.
At the same time, Washington desperately needs Beijing to keep buying American bonds, so that the U.S. government can run up a deficit and launch its own fiscal stimulus. In effect, we're asking China to finance simultaneously the two largest fiscal expansions in human history -- theirs and ours. Naturally China's priority is likely to be its own citizens.
"People often say that China and America are equally dependent on each other," says Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics. "But that's no longer true. China has two ways to keep its economy growing. One way is to finance the American consumer. But another way is to finance its own citizens, who are increasingly able to consume in large enough quantities to stimulate economic growth in China. They have options, we don't. There isn't really any other country that could finance the American
In his fascinating new book, "The Ascent of Money," Niall Ferguson describes the birth of a new nation after the cold war. He calls it Chimerica -- and it accounts for a tenth of the world's land surface, a quarter of its population and half of global economic growth in the past eight years. "For a time it seemed like a marriage made in heaven," he writes. "The East Chimericans did the saving, the West Chimericans did the spending." The Easterners got growth, the Westerners low inflation and low interest rates.
Like Stiglitz, Ferguson believes that China has options. "They will certainly try to keep American consumption going, but if it becomes clear that it isn't working, they do have a Plan B," he told me last week. Plan B would be to focus on boosting China's own consumption through government spending and easing credit to its people. "The big question today,"
Ferguson said, "is whether Chimerica stays together or comes apart because of this crisis. If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization."
In recent years the most important and difficult diplomatic posting has unquestionably been the one to Baghdad. Over the next decade, the toughest and most crucial assignment may well be in Beijing.