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There is really nothing to discuss about the US-China economic relationship. The hard reality is that the Chinese consumer sector has to grow faster than the Chinese economy as a whole; the US economy can no longer absorb export surpluses from its own economic activity and the willingness to run deficits to finance imports, especially from China, is falling more rapidly than the price of homes in Palmdale.|
This isn't a policy prescription. It's not a suggestion. It's simply the truth of what is going on. In the long run 1.3 billion people cannot rely on the expenditures of 300 million. Because these forces are not subject to policy, there is nothing for the US and China to discuss which is not also merely tweaking the margins.
However, under current conditions there is a problem. China is looking at an upcoming transfer of power as the current leadership makes its exit and a new generation moves in. This is always a difficult time for China's government, internal disputes become more dangerous for various careers. There is also the issue that China missed its chance to transition to a consumer economy while the former boom would have smoothed the transition. Finally, when China cleaned up NPLs in 1999, it did so by reducing Chinese household incomes and slowing wage growth to recapitalize banks. This presents a problem underscored by the massive numbers of protests that periodically grip China: many Chinese people are obliquely aware that they have not been the biggest winner in all of this.
This final problem has been reasserting itself during the current crisis. China's official stimulus has been large, but the unofficial stimulus has been much larger. There are severe doubts about China's self-reported debt levels of less than 25%, especially given the amount of speculation going on and the number of funding guarantees (which, while debt-like, do not count officially). A level closer to 60% would probably be more accurate. Underperformance is a potentially huge problem because enormous amounts of this have been funded through real estate collateral in a bubbly market and, worse still, many loans constructed buildings of questionable quality. Some may not exist by the time their bonds mature.
Once you add in the massive amounts of resource speculation, the financial picture in China is not merely debt-heavy, it is highly inverted. Should a global recovery fail in the near term, be slow or simply weak, this debt could explode. Will this create a round of bank collapses? No. But it will undermine the solvency of banks from the PBoC down and require the Chinese government to perform an operation like that in 1999. With consumption levels already low, wage growth depressed and NPLs in the pipeline, there are severe risks to social, and thus political stability in China if the export machine fails early.
This presents risks for China and the United States. China's leadership is unlikely to fail, but it could be motivated to pursue increasingly damaging international policies to deflect attention towards "outside actors". Leadership could also be captured by hardliners, a possibility that doesn't serve the interests of the US, the Chinese leadership nor the majority of the CPC.
There is, at base, nothing to discuss about Sino-American trade but there is a need to tweak the margins. If the US moves unilaterally on trade, changing the balance of trade, China faces severe risks and the long-term interests of the US will be negatively impacted by some of the possible scenarios. While none of these may come to pass, it is not worthwhile to take the risk. Hence the paradox of continued economic dialog: both China and the US must seek a way to maintain the status quo until either the real economy improves enough that China's position on the dollar can be unwound in an orderly way or until a successful leadership transition places China outside major political risks.
Economic dialog cannot "solve" the problem, it is like a failing dam; but the talks can delay its failure long enough to allow both sides to evacuate.