Reporting from Washington and Beijing – For much of the last decade, the economic relationship between the U.S. and China was like a bartender and his favorite patron.

American consumers knocked back flat-panel TVs, laptops and assorted other made-in-China products while Beijing rang up the charges, extending more and more credit so the customer could keep drinking.

On paper, the Chinese accumulated hundreds of billions of U.S. dollars. But instead of cashing in its horde, China lent much of it back to Americans to help finance ever-higher consumer borrowing, as well as federal deficits and cheap mortgages.

It was a mutually beneficial arrangement — until the morning after, when bartender and customer blamed each other for a doozy of a hangover.

With the Great Recession putting that mountain of American debt in a new, unsettling light, the two countries are eyeing each other with growing resentment — each showering the other with unwelcome demands for policy changes.

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March 24, 2010

(Remarks as Prepared)

In the 1970s, China injected itself with economic reform.  Now, in 2010, China appears afflicted by a menacing strain of that reform that is either constraining a global economic recovery or, worse, capable of creating a new economic pandemic.  While China’s emergence as an economic powerhouse has rightly grabbed our attention, however, the trends are not new, and there are some predictable similarities between China’s economy now and Japan’s in the 1980s.  It is critical that China address the serious flaws in its economic structure, but we should remember we’ve seen this before, although perhaps not on this scale.

This hearing is about China’s currency policy and global imbalances.  Like the IMF has, I can stipulate that China’s currency is undervalued, plain and simple.  I can also agree with G20 leaders that the world has steep imbalances that must be corrected.  But let’s not lose sight of the fact that there are fundamental problems with China’s economy, and let’s not pretend that China’s intervention in the currency markets, by itself, is the root cause of our ten percent unemployment or of China’s ten percent annual GDP growth.

We’ll hear today from some pretty bright economists on the problems with China’s economy.  I’m looking forward to hearing what they have to say.  My going-in view is that China’s deliberate and dangerous wealth transfer from everyday households to inefficient export-platform factories is standing in the way of the domestic consumption that the Chinese (and the rest of the world) believe the Chinese (and the rest of the world) so desperately need.  China must introduce global best practices into its banking sector, mature its financial markets, better protect intellectual property rights, and open more comprehensively to foreign direct investment.  China also should open its markets much more fully to all goods and services, particularly those coming from the United States.  Read the rest of this entry »

Sen. Charles Schumer (D-N.Y.) said Tuesday he would seek a vote by May on legislation that would punish China for currency manipulation.

The public call for a Senate vote before the Memorial Day recess builds pressure on President Barack Obama to take a tougher line with the world’s fastest-rising economic power.

Tensions between the two countries have repeatedly flared up this year; Schumer’s forceful tone came as Google was on the brink of being kicked out of China for ending censorship of its search-engine results.

U.S. budget deficits are aggravating China, which holds $2.4 trillion in currency reserves, much of which is held in U.S. dollars.

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