Peking Over Our Shoulder | The New Republic

Peking Over Our Shoulder | The New Republic: "And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. 'They were intrigued by the most recent legislative developments,' Orszag says. 'It was like, 'You're fresh from the field, what can you tell us?' '

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. 'At some point, if you refuse to contain health care costs, you'll go bankrupt,' says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. 'It's widely known among [Chinese] policymakers.' Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine--kind of the Chinese version of Fortune.

And so, whereas previous U.S.-China dialogues, which former Bush Treasury secretary Hank Paulson officially launched in 2006, consisted largely of discussions of international issues like trade, currency, and cross-border investment, this year's included conversations about domestic topics like health care and budget discipline. Indeed, the joint announcement that capped two days of talks in Washington actually included a U.S. commitment to 'reform its health care system with the aim of controlling rising health care costs for businesses and government . . . [and] reducing the federal budget deficit relative to GDP to a sustainable level by 2013.'

The language marks a shift in Sino-American relations that extends far beyond these formal meetings. For decades, while the United States has prodded China on any number of internal issues, the reverse has rarely been true, except for the vaguest exhortations. The notion that we might take advice from a developing country--even one as large and rapidly industrializing as China--would have been a blow to our self-image, at least if it weren't so laughable. Within a few short years, though, Washington has come face to face with a daunting new reality: Not only are the Chinese raising questions about our domestic policies, but we suddenly have to listen. 'The U.S. had all the answers once upon a time,' says a senior administration official. 'But China's not the apprentice anymore.'
...the Chinese had their own experience with large deficits in the 1980s--driven, in part, by health care costs and other generous benefits under the country's "iron rice bowl" system. The country financed the deficits by printing money, which created inflation and debased its currency. Against this backdrop, the ever-pragmatic Chinese have a hard time believing that Americans, faced with over $9 trillion in deficits this coming decade, might not avail themselves of the same option, devastating China's dollar stockpile in the process. The Chinese leadership shares these concerns--perhaps understandably so. Not only is the United States minting truckloads of debt each day, but, in recent months, the Fed has essentially printed money to buy up substantial chunks of it. "In the meetings I've had, they tend to ask me about . . . the Fed's ability to buy Treasuries," says Steve Orlins, a former State Department official and investment banker who now heads the National Committee on U.S.-China Relations. "The Chinese looked at that [and said], ‘There are two buyers: us and the Fed. That's a little scary.' " Chinese officials can be forgiven for worrying, in weaker moments, that the U.S. government is simply playing them for fools--hawking Treasuries whose value we intend to erode by spurring inflation."