Talking Point

US of eh???

Mid-term elections and QE2 bemuse Chinese

When Richard Nixon was ushered into Mao Zedong’s presence, the aging Chinese leader famously remarked: “I voted for you during your election. I like rightists.”

Mao, it seems, preferred dealing with the Republican Party. But what of his heirs in Beijing today? Last week’s US mid-term elections saw a shift in power back to the GOP, which now controls the House of Representatives.

Given the increasingly fractious state of Sino-US relations under the Democrats, is this an outcome Chinese leaders will welcome?

The view from China…

A Chinese netizen, writing on Sina, had a witty take on how closely the mid-terms were being followed in China last week when he wrote: “Today is the US mid-term election. With advances in voting-system technology, the results will come back the same night. But this technology is still behind China’s: we know the results even before the elections.”

It’s true that, in the absence of truly ‘democratic’ elections of its own, some Chinese find the circus of American campaigning entertaining. But given the size of the US – and the importance of its relationship with China – there is also a lot of speculation on whether the electoral outcome is good or bad for future ties.

The Wall Street Journal quotes another netizen who evidently holds with Mao’s legacy: “China-US relations are almost always at their best when the Republicans are in power! While Republicans talk fiercely anti-Chinese talk they are anti-Chinese openly, while the Democrats pull dirty tricks on us behind closed doors!”

A commentator on ifeng.com concurs: “The Republican tradition is to have a good relationship with big business. The US market is so decadent that more big companies want to invest in China to reduce costs. Under such circumstances, the Republicans probably will not quarrel over the renminbi exchange rate every day.”

China’s leaders have remained studiously quiet about the election outcome. But the nation’s academics – who often have much more of an advisory role in policymaking than those in the West – offer a proxy of sorts. While not an exact science, those quoted by the China Daily are some of the most likely to reflect official attitudes.

First up, Yuan Peng, the director of the Institute of American Studies. He sounds a cautious note, warning that the outcome “means a bigger challenge for China in dealing with the US”. His logic is simple: with the Republicans controlling the House, that means the Chinese government will not only have to deal with the Obama team but also with Congress. And he notes that “tough voices on China are not uncommon on Capitol Hill”. Unless the US economy rapidly improves, both parties will find China a useful “scapegoat”.

Slightly more optimistic is Shen Dingli, director of the Centre for American Studies at Shanghai’s Fudan University. He acknowledges that America’s China policies “will surely be affected”, but not for the worse. “As China’s national strength grows, a better Sino-US relationship is the historical trend,” he comments.

A common feature of most Chinese policymaking is a ‘wait and see’ approach. And that comes to the fore in a third verdict. “The current China-US relationship is unlikely to be changed by an election, at least not before President Hu Jintao’s visit to Washington next year,” comments Fan Jishe, a professor of American studies with the Chinese Academy of Social Sciences.

But Xinhua News Agency weighs in with a warier note. It’s not so sure about the ‘new’ Republican Party, thanks to the Tea Party element. “Their candidates lack political experience and relevant education. They are only trying to attract voters’ eyes by throwing these kinds of ‘political bombs,’” it warns.

Yes we can…

Evan Osnos, a Beijing-based staff writer for the New Yorker, senses little in the way of rejoicing at the Democrats electoral pounding. Given the likes of Senate Democrat Chuck Schumer’s tough talk on trade, Osnos expected that would be the natural Chinese reaction. However, he says the better informed Chinese commentators see the election instead as having “a chaotic, freak-show quality” (a former witch ran for senator). Osnos senses it hasn’t inspired much confidence that America is going to be governed any better.

Nor is there much confidence on show for Ben Bernanke, who has also made it a momentous week for US-Sino ties.

Last Wednesday, the Federal Reserve announced that it would buy $600 billion of long term US treasury bonds. Known as QE2, the latest act of quantitative easing is designed to stimulate the US economy, with earlier fiscal stimulus now fizzling out.

It is also creating concerns among other nations, most notably China. Chinese vice-minister Zhu Guangyao said the first round of quantitative easing was justified by the 2008 financial crisis, when the global economy lacked liquidity. But this time he reckons the Fed will flood the world with hot money, posing serious threats to emerging market countries, reports Bloomberg.

Geoff Dyer writes in the Financial Times: “China has faced large inflows of speculative capital in the past and is worried it could face a new wave. Indeed, on Tuesday China’s foreign exchange regulator said it would step up inspections of exchange transactions to curb potential inflows of hot money.”

When you already have a frothy property market, another tidal wave of imported cash will not help…

And this plays to broader Chinese inflation worries?

Yes, because the big fear is that QE2 will drive up commodity prices and thus further fuel Chinese inflation.

October’s inflation rate had already reached 4.4%, well above Beijing’s 3% target. For individual foodstuffs the rate of increase is higher. For example, the cost of vegetables rose 10.1% in October, according to the National Development and Reform Commission. Sugar is up 100% this year, garlic has surged 10 times, and ginger had risen 228% in the year to July.

The Chinese government worries about rising food prices as one of the greatest threats to social stability. According to HSBC economist, Qu Hongbin, they “topped the list of priorities” at the most recent State Council meeting on fourth quarter economic policies, and he forecasts another 25bp interest rate hike before the end of this year.

A rise in banking reserve requirements this week was also designed to choke-off inflation.

Commentator Niu Wenxin told CCTV2 that China is a victim of US policy. “The US is speeding up the output of hyperinflation to the world,” says Niu. “China is a big manufacturing country with a dependency on resources. The rise in raw material prices will do much more damage to China than the US. The main reason for inflation in China now is ‘dollar depreciation’ rather than excess demand in China. To control such price rises by increasing local interest rates is the equivalent of other people getting sick, but our taking the medicine.”

Obama has hit back at the criticism ahead of the G20 meeting in Seoul. He says QE2 will lead to higher US growth rates and that’s “good for the world as a whole”.

Dyer adds in the FT that it’s disingenuous for the Chinese to blame their own current bout of inflation on last week’s QE2 announcement. He points out that bank loans doubled last year and Chinese M2 – i.e. currency in circulation and bank deposits – grew 26%. “It is loose monetary conditions at home that are largely to blame,” Dyer concludes.

In fact, QE2 also has some upside for China. It diverts attention from the debate on its own currency and gets the Germans and Brazilians attacking the Fed instead. In something of a turnaround, it’s now the American administration (rather than the Chinese one) that has been forced onto the defensive about the value of its currency.


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