Asset protection or export growth: Politics suggest which matters more to China

Fascinating post from Brad Setser detailing China's holdings of USD holdings.

Therein, he describes the dilemma facing China: On the one hand, it wants the US to demonstrate fiscal restraint to protect the value of its USD holdings. But, China also wants a large and vigorous government stimulus package to keep exports humming along.

One dimension that isn't addressed in Brad's post is how (Chinese) politics affect how this dilemma gets resolved.

In my view, the political calculations made by China's leadership should make export growth the preferred option. Exports will bolster employment both directly and through continued attraction of foreign direct investment. This, of course, promotes social stability and keeping the party in power.

While any losses in Chinese USD holdings will likely provoke a firestorm of criticism, this will likely be contained and less likely to up-end the CCP apple cart than the former outcome. Also, losses due to debt monetization may not be as great as when the value of China's holdings are viewed in term of purchasing power parity.

This suggests that the US will, of course, offer the requisite genuflecting to China's concerns. But, from a practical perspective, it isn't in the political interest of China to take any serious action to deter the US from any fiscal actions that threaten the value of its USD holdings.

Wen Jiabao turns to health care and other social services

As the except below from the FT explains, Premier Wen Jiabao's (sometimes referred to as "Grandfather Wen" for his empathetic manner towards the common people or laobaixing) focus on domestic issues is a response to very real problems in China as well as a way to distinguish the current regime from the previous one. Because of these two powerful incentives, this policy orientation should be durable and will benefit businesses in health care and education, especially those with products or services suitable for the less well off.

Mr Wen has spurned the bright lights of the "new China" and the heavily publicised meetings with foreign business leaders that were a feature of the administration of Jiang Zemin and Zhu Rongji. Instead, he has played empathiser-in-chief, sharing meals with migrant workers, hugging Aids sufferers and heading underground for photo opportunities with black-faced coal miners.





Part of his approach is Politics 101 for any incoming government, which needs to distinguish itself from its predecessor before striking out on its own. And part is because foreigners, by and large, do not need cultivating any more. They are already here, or on their way. But most of all, Mr Wen's approach is an acknowledgement of the deep fissures left by China's rush for growth and the collapse of education, health and social services for the poor in cities and the countryside in the past decade.

Evidence of China as a responsible int'l stakeholder?

This demonstrates that at least one part of the PRC government wants to be viewed as a responsible stakeholder in the existing international order. Note that the foreign ministry's statement is at odds with that expressed by the sovereign fund itself. Stay tuned to see how this plays out.

China's foreign minister indicated yesterday that Beijing is willing to work on an international code of conduct for sovereign-wealth funds, showing a more flexible stance than was projected last week by a senior executive at China's sovereign-wealth fund.





"I believe that appropriately using sovereign-wealth funds based on international rules is beneficial to the concerned parties. The rules of the game, of course, ought to be set by all," Yang Jiechi said.