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U.S.-China Economics: They Need Us as Much as We Need Them

Posted Jul 27, 2009 01:07pm EDT by Aaron Task in Newsmakers
Related: FXI, FXP, PGJ, TBT, TIP, ^DJI, ^GSPC
This week's U.S.-China economic dialogue kicked off Monday with the usual pomp and circumstance befitting a visiting head of state, as well as a joint WSJ op-ed by Treasury Secretary Tim Geithner and Secretary of State Hillary Clinton.

Despite the fanfare, don't expect any major policy announcements to emerge, says William Gamble, president of Emerging Market Strategies, a consulting firm that specializes in emerging markets. "There might be some nice talk but the economics of both sides of the coin show there will not be any great announcements," he says.

The good news is Gamble believes China will continue to buy U.S. Treasuries, which should come as a relief to those worried about the $235 billion of securities being auctioned this week. "We don't have to ask them to buy our Treasuries, they simply don't have a choice," he says.

Because their economy is so dependent on exports, especially to the U.S., China needs us as much as we need them, Gamble explains. So expect China to keep funding our deficit -- by recirculating their surplus dollars into Treasuries -- and the U.S. to keep buying their exports, at least for the foreseeable future.

The bad news is this same dynamic will prevent the Chinese from letting their currency, the renminbi, float vs. the dollar anytime soon. If China's currency were allowed to trade freely it would rise in value vs. the dollar which would make Chinese goods more expensive for Americans.

"That would create less exports [for China] and make their unemployment situation worse," Gamble says. "The main thing policymakers in China are worried about is unemployment."

Presumably, U.S. policymakers are worried about the same thing but don't expect this week's economic confab to provide any help on that front, or any other for that matter.

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