JOHN YDSTIE, host: In the midst of all the financial turmoil this week, Vice President Biden traveled to China, America's biggest creditor. Joining us to talk about the U.S.-China relationship is Nicholas Lardy of the Peterson Institute for International Economics in Washington. Welcome.
NICHOLAS LARDY: Thank you, John.
YDSTIE: Vice President Biden met with Chinese counterpart, Xi Jinping, a rising political star. He also met with Premier Wen Jiabao. I want to ask you about an exchange with Mr. Wen. The premier said to Mr. Biden: It's very important that you send a clear message to the Chinese public that the U.S. will keep its obligations and maintain the value of U.S. treasuries. And then Mr. Biden responded: You have nothing to worry about in terms of their viability. I wonder what does this tell us about the relationship between the U.S. and China, that a top Chinese official would say this to a U.S. vice president in public?
LARDY: Well, I think it tells us a couple of things; that we're in a very close kind of co-dependency relationship. And the other interesting thing is that it shows a sensitivity on the part of the Chinese premier to public opinion in China. The government internally has been on the defensive. So, one of the interesting things is the premier said to the vice president: You need to reassure the Chinese public about the safety and stability of U.S. debt.
YDSTIE: Does it tell us something about who's on top in the international economy, or a sort of shift in power in dominance in the international economy?
LARDY: The economic center of gravity, in a way, has shifted as a result of the global financial crisis, and China came through it pretty well. I think we will look back on the financial crisis as a major inflection point that has reinforced the ascendency of emerging markets, of which China is obviously far and away the most important.
YDSTIE: Of course, one of the other underlying issues in global jitters that we're having right now is the question of growth. Obviously, we know the U.S. is struggling and some analysts are suggesting that China may end up with a quick slowdown in a hard economic landing. Do you think that's likely?
LARDY: I think it can't be ruled out but I would say it's a very low probability. China's been growing in the 9 to 10 percent range so far this year. The risk that they're going to slam on the brakes at this point as part of an anti-inflation program, I think, is really quite small. They're not going to take strong contractionary measures that would put them in a hard landing situation.
YDSTIE: But how do they grow if the U.S. and Europe are not buying their products?
LARDY: Well, they've been quite successful in maintaining strong economic growth, for example, in 2009 and 2010, when the United States and Europe were not doing particularly well. There are some questions medium-term over how long they can sustain this growth path. You know, in 2009, '10, when they had a big stimulus program, they probably built five years' worth of infrastructure in a two-year period. But you can't keep repeating that indefinitely. So, they need to shift more to more spending by households. And that's been one of the themes that the vice president has emphasized.
YDSTIE: What's your assessment of the value of a trip like this by Vice President Biden to China?
LARDY: I think this trip is quite important for several reasons. Of course, the most obvious is that Xi Jinping is all but certain to become the next president of China. He will be the chairman of the party as well. He will be the most powerful person in China. So, getting an early readout on the way he looks at the world can be quite important. And secondly, I think the Chinese are really looking to better understand what has been happening in the United States, and quite frankly, there's nobody better than the vice president to do this. He can explain with great authority exactly what happened and also give them a very good idea of what's likely to unfold over the next few months.
YDSTIE: Nicholas Lardy is a China expert at the Peterson Institute for International Economics in Washington. Thanks for joining us.
LARDY: Thank you, John.
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