This week, Vice President Biden travels to China to face his creditors. He is hoping to calm unease over the United States' much-criticized debt-ceiling deal and an upcoming decision on arms sales to Taiwan.
Despite expressed concern in Beijing over the safety of their dollar assets, Chinese holdings of U.S. Treasury bonds actually increased in June by $5.7 billion, bringing the total treasuries held by the United States’ top foreign creditor to $1.17 trillion. That’s right: even as it was clear that S&P was going to downgrade the U.S.'s credit rating (which it did on August 5) China increased its holdings. The Chinese, with $3.2 trillion in foreign exchange reserves, is being increasingly encouraged to diversify its investment, but it sure doesn’t seem to be doing so.
This week, as U.S. Vice President Biden sits in meetings with top Chinese officials—including current Vice President and soon to be General Secretary of the Chinese Communist Party Xi Jinping—the American leader will inevitably be working to reassure his counterparts that the future of U.S. debt is intact and that American policymaking is in good hands.
The Chinese press begs to differ. A recent piece in China Daily lamented that “The United States has become addicted to borrowing money,” predicting that the country is unlikely to tackle serious issues like entitlement reform and tax increases. An even more strongly-worded Xinhua editorial lambasted a “debt-ridden Uncle Sam”. Both agreed that there is little hope of any serious reform in the offing, as the United States gears up for the 2012 elections and compromise looks like an even sillier concept to the playful group of politicians in Washington.
So, on one hand, Biden will inevitably be working this week to quell Chinese concerns. But he’ll also be pushing China to revalue its currency, which U.S. Treasury Under Secretary for International Affairs Lael Brainard says remains “substantially undervalued,” despite its strengthening since June 2010 (the yuan has gained 6.8% since last year’s unpegging). Facing growing inflation, China certainly welcomes an edging up of the currency’s value. In July, inflation in China reached a three-year high of 6.5 percent. On Monday, Brainard echoed the Obama Administration’s long-time call for China to switch to a "domestic demand-led growth strategy”. This is largely in line with China’s own call anyhow—via its five-year plan—to promote greater domestic consumption and encourage China’s companies and individuals to invest abroad, as a means of tackling the country’s dangerous economic imbalances.
There will also be serious discussion of security issues—most importantly Taiwan. While a report on Monday from Defense News alleged that the United States is expected to reject Taiwan’s bid to buy 66 F-16C/D fighter aircrafts, government officials have denied that the decision (due on October 1) has been made. Vice President Biden has no intention of bringing up the Taiwan deal, say advisers, but you can be sure the Chinese will.
All of these serious issues make it sound like a rather unpleasant trip, to be perfectly honest. I’m glad I’m not rich, powerful or important enough to be part of it. The alternative for Biden, of course, is to be back in Washington, where things aren’t much better.
Johan Kharabi is Program Associate at Asia Society.