Obama plays China card, but who holds the ace in sino-America ties?

So the two countries have since found a way of discussing currencies that causes less of a stir in their capitals and in foreign exchange markets — and the new name of the game is “rebalancing.”

Although it was hesitant at first, Beijing got on board in Pittsburgh with a US call for an economic rebalancing.

The idea is for export-driven economies like China to boost domestic demand while big spenders like the United States strive to increase savings.

It is in this context that currencies could come up in the Hu-Obama meeting, said a senior US official who spoke to Reuters on condition of anonymity.

Economic growth

“It will be clear that part of rebalancing is having a more balanced economic growth that depends more on domestic demand and that obviously implicates macroeconomic policy in all its dimensions,” the official said.

This official rejected the widely held view that China’s vast holdings of US Treasuries are a matter of concern.

“They have an enormous stake in our economic success and we have an enormous stake in their economic success,” this official said. “That’s not a problem; it’s a good thing. It’s an enormously good thing and it should be welcomed.”

Prestowitz said China’s leverage is limited by an awareness that it too, would, suffer drastic consequence if it decided to suddenly unload its holdings of US Treasuries.

“It would be a mutually-assured destruction situation,” Prestowitz said in a view shared by many Chinese analysts.

“Under extreme circumstances, it might be possible for Chinese leaders to threaten to sell Treasuries,” said Xie Tao, an expert on US-China relations at the Beijing Foreign Studies University.
“But at the moment, I really cannot believe that they would do this,” Xie said.

Rebalancing and currency rows are new items on a list of US-China faultlines that has long been topped by Taiwan and human rights.

Taiwan is still the one issue that could trigger war between China, which claims sovereignty over the self-ruled island, and the United States, which is committed by US law to provide weapons for Taiwan’s defence.

But Obama’s tenure has coincided with a cooling of tensions between Beijing and Taipei thanks to the 2008 election of Taiwan President Ma Ying-jeou, who has sought better ties with China. But potential friction over US arms sales remains.

The Obama administration has angered some for appearing to play down human rights in the interest of gaining Chinese cooperation in combating the financial crisis.