The Group of 20 finance ministers gathering this weekend in England are of various minds about what should be done to address the international financial crisis, but two of the richest countries, the United States and China, on this occasion are standing together.
The U.S. and Chinese governments agree that the top priority should be to pump more money into the world economy to boost global demand.
When ranked by their purchasing power, the United States and China are the largest economies in the world, and the ties between them arguably make theirs the single most important economic relationship in the world today. For both governments, the global financial crisis has served to remind them of their deep interdependence.
A Complex Relationship
"They are the G-2," says Fred Bergsten, director of the Peterson Institute for International Economics in Washington.
"In particular," he said, "they've been growing more rapidly than anyone else. So it really does fall on the U.S. and China to lead the global recovery."
But this is a relationship with issues. Over the past few years, China's exports have vastly exceeded its imports, leaving it with a huge surplus. Much of that money has gone to buy U.S. government debt — about $1.3 trillion worth. It's partly those Chinese dollars that made U.S. mortgages so cheap — and led to the housing bubble that has now collapsed. It's also that Chinese money that's financing the current U.S. debt.
It's a financial connection that is unnerving leaders of both countries.
"For the U.S., I think it's uncomfortable to rely so heavily on one country and, in particular, one country's government for credit," says Brad Setser, a senior fellow at the Council on Foreign Relations. "And from China's point of view, it's got to be somewhat uncomfortable to have such a large share of your national savings lent to another country and to have such a large exposure to the dollar."
In fact, Chinese Premier Wen Jiabao said Friday he is "a little bit worried" about his country's big investment in U.S. debt.
"Of course, we are concerned about the safety of our assets," Wen said. "I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China's assets."
Neither China nor the United States, however, is in a position right now to do much about their economic interdependence. China invests in U.S. dollars for lack of a safer alternative. It could spend more at home, boosting imports and cutting back more on exports. But in a time of shrinking employment in China, such a move would be politically risky.
"The problem is, they need the export sector in order to generate jobs," says Eswar Prasad, senior fellow at the Brookings Institution. "Their job growth doesn't come from the state enterprise sector, which is largely focused on domestic manufacturing still. So they need the exports."
The U.S. government, meanwhile, depends on China to finance its huge and growing debt. Both countries therefore have to proceed carefully if they want to change their economic relationship.
"Any abrupt adjustment at a time when the global economy is already undergoing so many abrupt adjustments would make a difficult situation worse," Setser says, "but I think if it happens gradually, both countries should have an interest."
In the face of the global financial crisis, both governments are taking care not to jeopardize their ties. U.S. Treasury Secretary Timothy Geithner has not repeated earlier comments about China "manipulating" its currency to keep its exports cheap. And Chinese Foreign Minister Yang Jiechi, on an official visit to Washington, took pains to emphasize U.S.-Chinese cooperation.
"At a time when the international financial crisis continues to spread and develop," Yang said, "the primary common interest of China and the United States is to weather the storm together like passengers in the same boat and support each other to get through the tough times and emerge from the crisis victorious."
According to the International Monetary Fund, the U.S. and Chinese governments are devoting a larger share of their economies to stimulus programs than any of the other major G-20 countries, and they are together urging other governments to follow their example.
"When we get to the G-20 summit in London in a couple weeks, I hope that President Obama and President Hu Jintao will walk into the room arm in arm, challenge the Europeans and others to do what they've done," says Bergsten. "In that case, we would have a lot better prospect for a global recovery."
And maybe then China and the United States can start working on a more balanced economic relationship.