The US sent Ben Bernanke to Beijing this week. Cheers!
The US owes China – and it owes China big. In fixed-interest loans at last count, the debt stood at $641 billion. In October alone, according to Bloomberg, the US ran up a bill of $24.4bn for cheap goods shipped across the Pacific.
What to send by return as a thank-you this Christmas? The US exported two of its most valuable assets to China on Thursday, when Ben Bernanke of the Federal Reserve and Henry Paulson of the US Treasury flew out to Beijing.
Paulson was there for the inaugural meeting of the US-China Strategic Economic Dialogue. The Energy Secretary went along for the ride, together with the Health and Human Services Secretary...the Commerce Secretary...and the US Labor Secretary.
But there was only one policy matter really up for debate, which is why the Fed's No.1 was eating with chopsticks, too...
Will China please make its trinkets and baubles more expensive to US consumers?
Truly it's a mixed-up world we live in when the US Fed demands price inflation from America's No.1 source of cheap goods! The disinflation in everyday items that China's created has kept down US inflation...letting the Fed sit on Dollar interest rates...unleashing a feel-good bubble in stocks, bonds and housing.
The US Fed and Bush administration owe so much to China, in fact, they felt compelled this week to give Beijing free advice on how to manage its money. No doubt the Chinese will value Bernanke's advice at just what they paid for it.
"The Dialogue should help us manage and address the most important long-term issues facing our two nations while providing a forum to address the most pressing short term issues," said Paulson. In plain English, those long-term issues all revolve around the price of the Dollar and the price of the Yuan.
China's currency, says the US delegation, is way too cheap at the moment. It makes Chinese-made goods much too cheap in American stores. So if only Beijing would revalue, then Dollars would be worth less...and bingo! America's trade deficit would shrink overnight.
Or rather, it would shrink overnight for the Chinese. They'd be left owning Treasury bonds bought when the Dollar was stronger. The US wouldn't gain anything, but China would lose.
What's in it for Beijing, you might wonder.
"Further appreciation of the renminbi," urged Bernanke on Friday, "combined with a wider trading band and with the ultimate goal of a market-determined exchange rate, would allow an effective and independent monetary policy...[This would] enhance China's future growth and stability."
But hold on. The risks to China's growth and stability – barring a US recession – stem from the flood of US Dollars it keeps getting, says Andy Mukherjee at Bloomberg. All that money has to find a home somewhere. So China's banks are lending it just as fast as they can into whatever business investments ask for money each day. Hence the domestic threat, of a credit-led crash, is the real price of exporting cheap goods to the US.
"There are strong expectations that the People's Bank of China, which has already raised the [banking] reserve ratio by 2 percentage points in three steps since June, will be forced to act again to mop up the surfeit of liquidity being released by its massive trade surplus," says Mukherjee.
"The gap between exports and imports came in at almost $23 billion in November, more than double the previous year's level. The People's Bank of China's third-quarter monetary policy statement released last month included 70 references to liquidity."
All that liquidity is poring out of America and straight into China.
In short, both sides need a slowdown in trade. But neither side would admit it when they met in Beijing. "We agreed on many principles even though we have differences in the timing of reforms," said Paulson. His opposite number, Chinese vice-premier Wu Yi, said the talks were fostering "mutual understanding and trust."
Given the size of America's debt, trust seems a good place to start.