Source: The New York Times
China’s War on Low U.S. Interest Rates—When ImbalaEDITORS: After their summit meeting on Tuesday, President Obama and President Hu Jintao of China announced that they had agreed on many issues. But their statement was vague, in contrast to the pointed criticisms Chinese officials have been making of American financial policies in recent days. Over the weekend, China’s top bank regulator attacked the low interest rates in the United States, even though the Federal Reserve continues to indicate that it will not raise them anytime soon. Would higher rates in America be in China’s best interests anyway? While Chinese investments might earn higher returns, if American consumers spend even less if it costs more to borrow, would that be a bigger problem? Or is China less and less dependent on Americans’ ability to buy its products?
PETTIS: The criticism by China’s top bank regulator, Liu Mingkang, of too-low U.S. interest rates indicates how terribly confused the debate has become. Low U.S. interest rates and the expected depreciation of the American dollar encourage investors to borrow dollars and invest in Asia, where it may be encouraging additional investment in China, a country that is already drowning in too much investment.
But low interest rates in the U.S. will help reverse the sharp fall in U.S. consumption that has been catastrophic for China’s export sector.
China’s overinvestment problem was created as part of the imbalance that had Chinese overproduction feeding American overconsumption for many years. China’s huge stimulus is likely to increase production even further at the expense of domestic consumption, putting even more pressure on China to sell its excess capacity to American consumers.
So which hurts China, lower or higher U.S. interest rates? Unfortunately, both. That is the problem with imbalances getting out of hand. They are never easy to fix.