Tuesday, March 31, 2009

Strange analogy of the week...

The U.S. and China are locked in an "unhealthy embrace"...

April 1 (Bloomberg) -- Presidents Barack Obama and Hu Jintao meet for the first time today to discuss a global economic crisis each is trying to combat with policies that may further complicate U.S.-China relations.

As they meet ahead of a gathering in London with other leaders from the Group of 20 advanced and emerging economies, the two presidents are directing a combined $1.4 trillion of stimulus spending.

While their efforts will soften the impact of the global recession, analysts say U.S. spending to stimulate demand and China’s focus on investment in public works are likely to exacerbate the global imbalances that inflated asset bubbles and brought on the collapse of credit that helped trigger the current crisis.

The two countries remain locked in “an unhealthy embrace,” said Charles Freeman, a U.S. trade negotiator who is now at the Center for Strategic and International Studies in Washington. “How we ease that embrace so we can stay embraced but not choke ourselves to death in the process is going to be a serious thing that we deal with in the next decade.”

Obama’s $787 billion stimulus package runs up budget deficits to be financed by more Chinese purchases of U.S. debt. Such a prospect leaves Chinese Premier Wen Jiabao “worried” about the safety of China’s $740 billion holdings of U.S. Treasury securities, the world’s largest, he said March 13.

China’s Stimulus

Meanwhile, Hu’s 4 trillion yuan ($585.4 billion) stimulus plan doesn’t help build the domestic consumer demand that China needs to support its own industries and reduce its reliance on exports, says Ha Jiming, chief economist at China International Capital Corp. in Beijing.

The plan will “delay a rebalancing toward greater consumption-driven growth because about 75 percent of its spending is for infrastructure,” Ha says.

Unless the two countries break a cycle that requires China to continue lending so the U.S. can keep spending, “we’re headed to another major crisis, and it could be worse than this one,” Stephen Roach, Morgan Stanley’s Asia chairman in Hong Kong, said in an interview.

Obama administration officials say that, with the global economy forecast to shrink in 2009 for the first time in more than 60 years, this isn’t the time to address such issues.

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