Three Bold Suggestions That Could Save The China-US Relationship

On the eve of the media hyped and politically charged visit of the PRC’s President Hu Jintao, I have some advice for him and by extension, President Obama.

This advice comes at a time when Sino American relations are hitting new lows due to continued accusations by Washington policy makers that the Chinese are “manipulating” their currency with threats of trade wars and concerns as well that they are ramping up their military…with a focus on creating a blue water navy.

We live in a difficult economic environment and this is not the time for people who live in glass houses to be throwing stones.

For example, it is difficult to understand the logic behind Treasury Secretary Geithner and Senator Schumer accusing the Chinese of manipulating their currency when the US Treasury and Federal Reserve are engaged in the same strategy with the US $.

And of course, for their part, the Chinese with their mercantilist trade policies are just as guilty.

Neither country in the important G2 relationship appears willing to accept the fact that what’s good for one is also good for the other when it comes to shaping trade policy.  It’s time for someone to shake off the latest bout of parochialism, show leadership, change the tone and raise the dialogue back to constructive levels.

The G2 leader who takes the first step will create a tremendous legacy for himself…just as Richard Nixon did when he reopened the diplomatic door to China and helped pave the way for China’s emergence as an economic power. Of course I doubt if the Chinese give him enough credit for that…as they prefer to focus on the liberal reform work of Deng Xiaoping who was the architect of “capitalism with Chinese characteristics”.

And that is of course expected from a country that has felt used and taken advantage of by outside forces for centuries. But Nixon did play an important role in helping to bring China to where they are today…and so did President Clinton who, to his credit, helped to bring China into the 21st Century by pushing for their full membership in the WTO. Both politicians faced serious political risks at home with these moves but they had the vision to look at the big picture and the courage to push for what was clearly the right thing to do. They rose to the occasion.

So now it is China’s turn to step into the breech and do the right thing. America’s leadership has done their part to work in a proactive fashion to help lay the foundation for a constructive partnership with China that helped to catalyze their strong position in the new economic world order…now President Hu…with his timely visit to Washington can rise to the occasion too and show the world real leadership.  By his words and more importantly by his actions he can show that China is not just another self absorbed surplus economy looking out for its own interests and that it recognises that the economic destiny and future success of the United States is heavily geared to their own.

So what actions can he take? To begin, I would recommend a three part strategy:

  1. He should take a big chunk of the almost $3 trillion in currency reserves they have accumulated and reinvest it back in the Chinese people by creating a social safety net that will help to reduce their growing need to dump their earnings into savings accounts (earning almost nothing) and encourage them to consume. This big step toward rebalancing their export driven economy by focusing on domestic consumption is needed now. It will take time but it can be jump started by investing the surplus in their people…not US Treasuries.
  2. They should speed up the process of liberalizing their capital account and reforming/opening up their economy. They should give us a date certain as to when they expect this to happen and when the yuan will become fully convertable. Also it would be helpful to know what the criteria/benchmarks are that they will use to achieve these goals…ie make the process more transparent.
  3. Finally and this is a big one…..I would recommend that President Hu propose to President Obama that we begin the process of creating a free trade agreement between China and the United States modelled along the lines of NAFTA…the goal of which is to help remove the trade imbalances that exist between our two countries and more importantly to send a message to the rest of the world that the two most important global economies are open for business!!

These of course are all bold steps. And they involve political risks for both Presidents Hu and Obama. But we live in a world today that suffers from a lack of leadership. In the past we have had American leaders who have understood the global picture and saw China’s important roll as partner in it and rose to meet the challenges of the day and helped China to become the economic powerhouse it is today. It’s time for China’s leaders to step up to the plate and do their part. President Hu is at bat.

Peter D. Stock

Stock Investment Mg mt

Manchester Vermont

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