One of the great ironies about the Sino-American financial relationship is that most Americans believe that China has been screwing the U.S. over through their massive accumulation of dollars, while most Chinese believe that America has been screwing China over through.... their massive accumulation of dollars.
Well, what if the accumulation is not so massive? Yesterday's New York Times story by Keith Bradsher suggested that China was buying far fewer dollars than it used to, and therefore we can all breathe easier about China using its dollar holdings as a form of foreign policy leverage:
Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.
Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that “I think it’s mainly in favor of the United States.”
He cited a saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”
I don't disagree with Yu, but I do disagree with Bradsher. It's necessary to separate China's willingness to use its reserves as a lever from the expectation that such a lever will net it significant concessions.
As long as China is heavily dependent on the U.S. market as a source of economic growth, it is fundamentally constrained in using its reserves in a strategic manner. Regardless of its feelings towards the United States, Beijing will not take actions that shoot itself in the economic foot.
If, however, China manages to decouple its economy somewhat from the U.S. market, then the calculus of compellence changes. Such a decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements. It would also reduce whatever constraints economic interdependence has placed on China's financial statecraft.
This is the paradox -- the more leverage China has, the more reluctant it will be to use it. The more willing China is to use its reserves in a strategic manner, the less likely such statecraft will yield anything in the way of meaningful concessions.
[This sounds.... familiar.--ed. Oh, shut up.]
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