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Apr 07, 2009

The path to U.S. economic recovery runs through Beijing.

By Alan Stoga

What’s the most important financial number that no one knows?
No, it’s not the price of pork bellies or the stock market Volatility Index or even something called the “CDS price on long-term U.S. Treasury bonds”—an indicator, by the way, that is now flashing yellow because of the massive increase in deficit spending.
The real mystery number is 6.8: the number of Chinese renminbi you can buy with one dollar.
Why should you care? Because what happens to that number may determine how and when we recover from the current recession.
China’s hyper-growth economy was built on exports and high savings. Wal-Mart shelves are packed with cheap Chinese-made products that help Americans cope with the squeeze on their incomes. Their savings financed our deficits. And a weak currency helped make that happen.
Now, however, we need China to import and consume. That means making Chinese exports more expensive and encouraging Chinese consumers to spend more. And that requires a much stronger exchange rate.
Wal-Mart shoppers won’t be happy, but it would mean we could sell more Caterpillar tractors or American Apparel’s California-produced clothing to the Chinese. More exports to China could help lead us—and the rest of the world—out of this slump.
So far, so good. However, there is a hitch.
The Chinese government has lent us more than $1.5 trillion. They are already nervous about the value of that massive pile of debt, and now we want them to pay for our mega-deficits.
But a falling dollar—the flipside of a strengthening Chinese renminbi—would lower the value of the U.S. government bonds that we need the Chinese to buy. That’s not a great way to get them to invest more.
In other words, as James Fallows recently pointed out in The Atlantic: “The Chinese can give us money, or they can give us back some jobs. But not both.”
That doesn’t mean we won’t ask them to do both. It also doesn’t mean the Chinese won’t respond by adopting protectionist measures to keep the global recession as far away from their shores as possible.
But here’s where a bit of history comes in handy. Seventy years ago, the U.S. was the world’s workshop as well as its creditor—just as China is today. When the Great Depression hit, we tried to limit its domestic impact by erecting trade barriers. The result was a longer, deeper downturn for us and for the rest of the world.
We can’t afford for the Chinese to make the same mistake today.
Which leads to another critically important number.
Perhaps it’s time to forget about crowded economic summits. What we need now is a G-2—and some hard bargaining between Washington and Beijing to save the global economy.


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