RMB Appreciation and US Debt

Economic interaction has a super vital impact on Sino-American relations considering the fact that the U.S. administration officials and their Chinese counterparts presided over an ever-increasing economic interdependency between the United States and China. They both need each other to recover from ongoing global financial crisis and they still have unsettled and potential economic conflicts. 

As the United States’ largest creditor and import country, second largest trade partner, third largest export market, China had an important influence on buffering negative impacts of the global economic recession and increasing job opportunities in the U.S. When President Hu Jintao paid the state visit to the U.S. in January this year, China announced a series of commercial deals to purchase USD 45 billion in the U.S. exports, supporting 235,000 jobs in the United States. China in turn has been influenced in important ways by America’s leading economy, source of foreign investment and technology. As the China’s largest export country, the U.S. is playing an irreplaceable role in boosting economic development in China considering the fact that foreign trade accounts for 49.34% of China’s GDP in 2010.

According to Pew Research Center, 47% of Americans think China is the leading economic power while only 31% think America is 

However, these two countries’ economic relations are not that smooth in recent years. More recent U.S. initiatives and complains reflect a wide range of U.S. interests and constituencies concerned with RMB undervaluation.  Criticism in the United States over China’s currency policy emerged in recent years against the background of the massive and growing U.S. trade deficit with China, USD 273 billion in 2010, and complaints from U.S manufacturing firms and workers over competitive challenges by Chinese imports. Facing the international pressure led by the U.S, RMB has been allowed to floating a narrow margin around a fixed based rate, determined with reference to a basket of world currencies since 2005. Even though RMB has appreciated cumulatively by 6.7% since June 2010 when RMB was unpegged to US dollar, groups of senators in September still announced that they would pursue legislation requiring the Obama administration to push harder for China to allow RMB to further appreciate in a quicker pace. As a response, China’s government called on the U.S. to self-examine its severe economic problems and claimed that blaming “undervalued” RMB exchange rate is not an effective way to reduce trade deficit and increase job opportunities.



The Chinese administration also eschews major initiatives that have the potential to disrupt existing economic relationships seen as largely beneficial for Chinese interests. As America’s largest creditor with 1.17 trillion in Treasury Securities as of February 2012, China has significant national economic interests in the stability of the U.S. dollars and in the United States meeting its paying obligations. Debt crisis in the U.S. facilitated China initially to criticize American government “irresponsible” and “immoral” of untangling the crisis through the wrangling among Republicans and Democrats. Standard& Poor’s stripping the U.S. of its triple A credit rating for the first time further alerted China. It demanded the U.S. address its structural debt problems and ensure the safety of the U.S debt China holds.  


China's response to US Debt Crisis

What are the implications for Sino-US economic relations in terms of RMB appreciation and debt crisis? These two conflicts matter valuation of RMB and both countries’ domestic economic health. Even though RMB has unpegged to US dollars, China carefully manages its currency to closely track the value of the U.S. dollar. Any major disruption in the stability of the dollar will therefore have powerful implications for the stability of the RMB and has potential complications for both countries’ economic health. Overwhelming RMB appreciation or a crisis in the value of the dollar due to debt crisis could directly spur inflation or a disruption in China’s export machine. Despite Chinese long-term planning to move toward an economic model of domestic consumption, exports to the United States are still a significant driver of economic growth in China. So if these conflicts not dealt very well would directly impact U.S. consumer confidence and spending ability, thus reducing demand for Chinese exports; and force tough inflationary decisions in Beijing about maintaining a link between the RMB and a plummeting dollar and thus decreasing the U.S. domestic demands; increase the risk to Beijing of maintaining its pole position as a global purchaser of international debt instruments, worsening global economy, including the U.S.

On the whole, the Sino-American economic relationship has had a positive effect on the relations between the two countries. Despite the increasing trade frictions and RMB dispute between the two countries, China and the U.S. have the least possibility to launch extensive “trade wars” at the expense of each other’s significant market and investment, especially during the global financial crisis. Both governments have declared many times that the current and potential economic conflicts can only be solved through negotiation and collaboration without harm to current economic interdependency.