Clinton sounds the China alarm as ’08 issue

Tom Curry National affairs writer • Profile • E-mail

WASHINGTON - Many voters, pundits and pollsters think Iraq will be the decisive issue in the 2008 election, but increasingly Democratic presidential contender Sen. Hillary Clinton is focusing on another country: China.

Clinton is making America’s dependence on Chinese investors a central theme of her 2008 message. She took to the CNBC airwaves Thursday to declare that America was undergoing “a slow erosion of our own economic sovereignty.”

Tuesday’s nine percent slide in the Shanghai and Shenzhen stock index, which helped set off a plunge in U.S. equity markets Wednesday, gave Clinton a fresh opportunity to argue that America’s economic well-being has become too dependent on what happens in China.

In a letter to Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, Clinton said Wednesday’s stock market sell-off “underscores the exposure of our economy to economic developments in countries like China. As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker.”

Time to 'get tough' on China?
In her recent speech to the Democratic National Committee Clinton told the story of one of her New York constituents who approached her complaining of loss of manufacturing jobs and asked, “Why can't we get tough on China?”

Clinton’s reply: “How do you get tough on your banker?"

She argued in her letter to Paulson and Bernanke that Congress and the president had to “ensure foreign governments don't own too much of our public debt."

She warned in her letter to Paulson and Bernanke that “if China or Japan made a decision to decrease their massive holdings of U.S. dollars, there could be a currency crisis and the U.S. would have to raise interest rates and invite conditions for a recession.”

It’s not only Clinton who’s using the China theme; one long-shot Republican presidential candidate is also sounding an alarm.

China, said Rep. Duncan Hunter, R-Calif., in a recent television ad is “cheating on trade and they’re buying ships, planes and missiles with our money, as well as taking millions of jobs.”

Chinese buying U.S. bonds
Meanwhile non-partisan economists are warning not specifically of Chinese holdings of U.S. Treasury securities, but more generally of the U.S. current account deficit, which reflects the excess of U.S. imports and borrowing over American exports and lending abroad.

When China sells more to America than it buys from America, it invests many of the dollars earned in dollar-denominated assets such as Treasury bonds.

In recent testimony to the Senate Budget Committee, Fred Bergsten, director of the Peterson Institute for International Economics, pointed out that the current account deficit “now accounts for about 7 percent of GDP, more than double the previous modern record of 3.4 percent in the middle 1980s.”

If foreign owners of dollar-denominated assets decide to sell them, it could spark a decline in the dollar’s value.

Message board What do you think of Clinton's candidacy?

“The possibility of a sharp dollar fall is in fact the greatest short-term risk now emanating from our budget deficits and provides the most compelling reason for urgent action on them,” Bergsten said.

As of the end of 2006, Chinese investors held $350 billion in U.S. Treasury securities, about 15 percent of the total foreign holdings of Treasury securities. Japanese investors held a bigger chunk ($640 billion) of Treasury securities than did the Chinese. And the British and Japanese together held $848 billion, more than twice as much as Chinese investors hold. 

But China is a more problematic creditor due to US strategic conflicts with China, such as its recent test of an anti-satellite weapon.

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