Innovation Blog

Hu Jintao in America – U.S. vs. China

By Shlomo Maital 

 Here are a few brief observations about U.S.-China relations, as Chinese President Hu Jintao ends his U.s. visit, in Chicago.

  • President Obama is a lawyer.  Hu Jintao is an engineer.   So is Premier Wen Jiabao. Whom would you choose to lead a nation into new technologies and innovation, a lawyer or an engineer?  When was the last time America chose an engineer as President? (Answer: Jimmy Carter, 1976, but he was trained as a nuclear engineer, and never really practiced). 
  • What subject was studiously avoided during Hu’s visit?  The trade deficit.  America’s overall trade deficit shrank in October, last available data, to $38.4 b., but the trade deficit with China grew, to $25.6 b.  In other words,  two-thirds of America’s trade deficit is with China.  Why? Because the U.S. no longer produces stuff China really needs.  Containers from China return from Long Beach Harbor to Shanghai carrying…paper for recycling, or are simply empty.   
  • Look for China to be increasingly assertive, as its economy grows.  According to a recent McKinsey Report by Gordon OrrUs :     “China will step up its “invest out” program in the new five-year plan. The government may well seek to double the country’s cumulative outbound investment within the next five years. There will be resistance by governments in some countries (probably in Africa, Eastern Europe, and Latin America) where public opinion is not yet convinced that so much Chinese ownership of key assets is really attractive. This opposition will visibly upset China’s leaders, who may decide to sell the bonds of the reluctant governments and to increase the challenges that enterprises from these nations face in selling to Chinese state entities.”

   Herein is the answer to America’s reticence about its trade deficit with China. China can crash the dollar, simply by ceasing to buy U.S. Treasuries at the weekly auction, let alone sell a tiny fraction of its $2.8 b. worth of dollar assets.

  • A Times of India article [1] asks:  Did China overtake the US as the world’s biggest economy in 2010?  New numbers for the GDP of different countries at purchasing power parity (PPP) seem to suggest so.   When you correct China’s GDP, by dividing GDP measured in renminbi (yuan) by the appropriate exchange rate (that accurately reflects the high purchasing power of the yuan), some experts find China’s GDP exceeds America’s (though, of course, its population is four times greater, so its GDP is still only about a quarter that of America.  According to economic Arvind Subramanian, “the adjustments increase China’s GDP from the current estimate of $10.1 trillion to $14.8 trillion (an increase of 47%, of which 27% is due to the revision in the 2005 estimate, and the rest due to smaller-than assumed increases in the cost of living between 2005 and 2010. This $14.8 trillion figure exceeds US GDP of $14.6 trillion.”   There is psychological significance to this number.  The world’s largest economy conveys substantial geopolitical clout as well.

[1] 21 Jan, 2011, by Rukmini Shrinivasan.