The game of competition and cooperation between China and the United States is destined to be a lasting war.
Text: Chen Jiulin (Chairman and President of Beijing Joseph Investment Co., Ltd.), Chen Baiying (Master of Management from Xi'an Jiaotong Liverpool University)
Editor in charge: Embracing the world
At the end of September, the Ministry of Finance announced that China and the United States had agreed to establish an economic working group, including the "Economic Working Group" and the "Financial Working Group". These two working groups will hold regular and irregular meetings to strengthen communication and exchange on relevant issues in the economic and financial fields between China and the United States.
As is well known, since 2018, China US economic and trade contacts have mainly focused on negotiations, and high-level dialogues, especially communication mechanisms for problem-solving, have almost always been suspended. Moreover, after the outbreak of the Russia-Ukraine conflict, Sino US relations fell into confrontation. In fact, since the outbreak of COVID-19, Sino US relations have gradually fallen into the freezing point. So, the recent communication between China and the United States clearly has significant practical and long-term significance, and has received widespread attention from the international community. It may mean that after several years of extreme gaming, China and the United States have finally ushered in a "midfield handshake".
The interest rate hike cycle of the US dollar
On September 30th, the US fiscal year 2023 ended. Unlike the domestic fiscal year, the US government's fiscal year runs from October 1st to September 30th of the following year. From a data perspective, the US government's fiscal deficit in the first 11 months has reached $1.5 trillion, a year-on-year increase of 61%. As of now, the United States has raised interest rates 11 times, reaching a high range of 5.25% to 5.50%, reaching its highest point in 22 years. In fact, the logic and model of interest rate hikes in the United States are very simple, that is, the Federal Reserve attracts global funds to flow back to the United States with high interest rates, while the US Treasury Department supports the US economy by increasing deficits and issuing US bonds. This approach can be understood as the United States using high interest rates to suppress inflation while overdrawing to stabilize the economy. For other countries, either they can follow the United States to retain foreign investment through high interest rates - resulting in a sluggish economy; Either lower interest rates to stabilize the economy - foreign capital flows out as a result. This is what the market calls the 'dollar tide', and it is also a 'classic routine' for the United States to 'harvest' the world every time.
Although many experts have been praising the debt problem and crisis in the United States, from the perspective of the US Treasury Department, there is no need to worry about debt at all because it has no intention of repaying it. As soon as the debt matures, simply raise the debt ceiling and borrow new debt. In the eyes of the US Treasury, there is only one truly urgent issue, which is high interest rates.
The so-called "interest rate" can be seen as the economic cost of a society - the higher the interest rate, the higher the cost of economic operation. Based on the current total amount of US $33 trillion in treasury bond bonds, every 1% increase in interest rates will lead to US $330 billion in interest expenses. If calculated at a 5% interest rate, the annual interest expenditure of the US Treasury would be as high as $1.65 trillion. If the Biden administration wants to continue maintaining high welfare to win votes, this number will undoubtedly continue to climb. And this has not yet calculated the debt and default data of American companies and individuals. The rise in interest rates is bound to increase enterprise costs and increase the overall economic burden. With the gradual expansion of debt scale and the continuous high operation of superimposed interest rates, the US government will also have to repay more and more debt, which will continuously weaken the flexibility and sustainability of the US fiscal system.
Struggle under high interest rates
High interest rates are a double-edged sword, which not only suppresses inflation but also harms economic vitality. At the beginning of 2023, Silicon Valley Bank, Signature Bank, and First Republic Bank in the United States successively went bankrupt. Based on the total asset size, the total asset size of the three banks mentioned above alone is close to $550 billion, far exceeding the total assets of the 25 failed banks during the 2008 US financial crisis. The heavy cost of high interest rates for the United States is evident from this. The financial crisis that spread from the United States to the world in 2008 is also related to the US interest rate hike. On the surface, it may seem that the financial crisis was the result of the subprime mortgage crisis, but an important fact that we cannot ignore is that from June 2004 to July 2006, the United States raised interest rates 17 times in a row, raising the benchmark interest rate to 5.25%, laying the groundwork for the 2008 subprime mortgage crisis, and by August 2007, the "subprime crisis" in the United States began to emerge.
It is not yet clear whether this wave of high intensity interest rate hikes in the United States this year will have more serious consequences than in 2008, but it cannot be ruled out.
The main purpose of this wave of interest rate hikes in the United States is to curb inflation. Although this goal has achieved short-term results, with OPEC+'s oil production reduction, the continuation of the Russia-Ukraine conflict, and the so-called "de Chinesization" policy of the United States and the West, the United States may face two major problems: or, inflation before interest rate increases will revive; Alternatively, the economy may experience stagnation. As of July 2023, the excess household savings in the United States had fallen to $81 billion in the previous period, and by the third quarter of this year, these excess savings may have been depleted, as most of the savings group with an annual income of less than $50000 had already started living as a "moonlight tribe" in July of this year; 65% of people with an annual income of 50000 to 100000 also experience the same problem. For US President Biden, who will go all out to run for re-election next year, the Russia-Ukraine conflict, inflation, economic stagflation and other issues are the focus of his suppression by his sworn enemy Trump.
In terms of the US economy, whether the US continues to borrow new bonds, high interest rates and high corporate costs, it needs the support of China. The US hopes that China can maintain old US bonds and increase new US bonds, as well as cheap goods and services from China, especially the support of the entire industry chain. For Biden, in order to succeed in re-election, on the one hand, he needs to play the "China card" - speak ill of China, suppress Chinese technology and Chinese enterprises; On the other hand, it is necessary to strive for China's support for the US economy.
At the same time, the United States' tariff sanctions, technological crackdowns, and continuous interest rate hikes have also to some extent suppressed the development of China's economy. In the past thirty years, whenever facing economic downturns and global crises, China's economy has mainly relied on the two pillar industries of exports and real estate, successfully achieving breakthroughs. Nowadays, the United States continues to implement the Trump era tariffs on China, which hinders exports to the United States; The severe inversion of interest rate differentials between Chinese and American banks has led to the market withdrawing funds from China; The series of measures taken by the United States to contain China have affected the development of some industries such as technology and manufacturing in China. In addition, the downturn of China's real estate market and the lagging negative impact of the COVID-19 on economic growth have led to a lack of economic growth.
Obviously, China's economy has integrated into the international environment, system, and background, and economic development requires a stable international environment. Whether in the short or long term, China and the United States have mutual needs and are difficult to decouple. An improved Sino US relationship will be beneficial for the development of both sides.
Competition and Cooperation "is the Future Spindle of Sino US Relations
Some people say that the current tense Sino US relations are like the Soviet US relations during the Cold War. I don't think so. In my opinion, there is a fundamental difference between China US relations and the Soviet US relations. China and the United States are highly integrated economically and interdependent in many other fields. Although the United States has attempted to shift its industrial chain out of China in recent years to countries such as Vietnam, India, and Indonesia, these countries are unable to compete with China in terms of industrial chain integrity, market size, or worker quality. This determines that these countries cannot replace China in the short term; In the long run, the United States will also find it difficult to rely on these countries to decouple and disconnect from China. Continuing cooperation between China and the United States is the best choice.
Some people in the United States believe that in order to contain the Soviet Union, the United States included China in its economic system, which led to China's development but posed a "threat" to the United States. Therefore, these people feel that the United States has been deceived. The mistake of this view lies in neglecting the inevitable trend of China's self-development, as well as the important contribution that China's development has made to the United States and the world economy. It also misjudges and exaggerates the negative impact of China's economic development on the future world - they treat China as a small person and a gentleman, mistakenly believing that China will be "strong but dominant" like the United States. The important relationship between China and the United States that is most beneficial to both the two countries and the entire world is one of mutual cooperation and win-win development.
The history, present, and future of China US relations all determine the deep integration and inseparability of China US relations. China and the United States have reached a stage of "competition and cooperation" in management studies. There will be containment and suppression of China by the United States between China and the United States, but there will also be occasional easing and cooperation. At the same time, this game of competition and cooperation between China and the United States will also be destined to be a protracted war. In summary, China US relations are bidding farewell to the past and opening a new chapter.