OPINION> Columnist
Sino-U.S. trade war unlikely to occur
By Li Hongmei (chinadaily.com.cn)
Updated: 2009-02-02 11:16

It seems that there are ample reasons to predict a trade war between China and the U.S. following power reshuffle in Washington, as both the Democratic president Barack Obama and his Secretary of State Hillary Clinton pledged a tough line on China during the campaign.

Last week, The U.S. Treasury Secretary Tim Geithner, accused China of ‘manipulating’ the yuan for economic gains, which Premier Wen Jiabao brushed aside on his unfolding European tour pointing China’s present exchange rate policies are appropriate for the world economy.

As a matter of fact, since China adopted a managed exchange rate system in 2005, the RMB has risen by 20 percent against the dollar. ‘To maintain the stability of the Chinese currency on a reasonable and balanced basis at this moment will play a positive role in stabilizing international finance and the economy,’ Premier Wen said.

EU officials said they regarded the need to boost Chinese domestic demand as more important than the exchange rate issue, and they drew some comfort from Premier Wen’s promise that China would ‘develop and improve’ a $ 585 billion fiscal stimulus that it announced last November.

Many international analysts also regarded Geithner’s unsubstantiated criticism at China on the exchange rate issue as ‘a shot across the bow’, merely boding ill for Sino-American relations, which is deemed ‘complicated but vital.’ Perhaps Geithner’s strong ‘warning’ carried a hidden message that the new administration would be tough on China on trade issues. But at a time when the U.S. is struggling to weather its worst economic crisis in 26 years, and when Obama administration needs money to jumpstart the economy, the last thing for the U.S. to do may be to start a trade war with China, the largest buyer of U.S. treasury bonds and other government-backed debt.

China saw a foreign reserve growth only in recent years, mainly pushed by its trade surplus and investment from other countries. Due to its ever-increasing economic openness to the outside world, China has been considered by foreign enterprises as an ideal investment haven. Consequently, the export by China-based foreign enterprises takes the lion’s share of the country’s total export volume.

With the enormous foreign reserves in hand, but without any better options for investment, China had to turn to buying U.S. treasury bonds. However, such investment has brought China almost a zero return as the Federal Reserves continuously lowered interests rates for the sake of economic stimulation. Needless to say, the inflow of foreign capital has greatly spurred China’s economy at certain times, and meanwhile, China’s huge foreign reserve investment has also provided the U.S. economy with its desperately needed fund resources. But owing to its defective financial monitoring mechanisms, the enormous amount of fund from China proved to have been misused.

To shirk their own responsibilities, some politicians in Washington recently claimed the emerging economies including China should be held accountable for the ongoing global financial crisis, which is not only groundless but more like a policy of finding scapegoat, and which would dampen Asian nations’ enthusiasm to continue to buy U.S. national debt.

Considering the facts as follows-- China is America’s largest creditor, holding one-tenth of U.S. debt—US$ 11 trillion. Washington also needs Beijing’s cooperation to solve a number of pressing world issues. Likewise, Beijing needs American consumers for exports and GDP growth, which stood at 10 percent in 2008 despite the global economic slump-- an imminent trade war between the world’s largest and third-largest economies is highly unlikely.

It was reported that President Obama called President Hu Jintao over the weekend to express his hope for maintaining ‘strong, constructive’ relations, and for closer cooperation in dealing with pressing world issues. In view of the circumstances and the national interests respectively, war of words may persist, but Sino-U.S trade war is very unlikely to occur at the time.