Currently China holds large amounts of US assets to keep the circular finance-trade relationship constant. With the enormous trade deficit the US has with China, there has been an increasing loss of jobs in manufacturing over the past few years. Related to this, there is a rising debt owed to China along with a more unstable macroeconomic environment caused by the recent financial crisis which makes the situation appear especially bleak. Since 2000 China has increased its purchase of US assets, but due to recent events China could decide to let the US assets it holds deteriorate to nothing as its economy can easily absorb this. In relative terms this would cause far more damage to the US economy than would it to China’s economy. Though this has been the typical relationship for the past eight years it appears that China is taking a new direction due to the financial crisis and lower consumer spending in the US. Along with this new direction it is important for US policies towards China to shift to maintain constructive relations.

The scenario of China dumping US assets is not likely to occur and China probably will keep financing US debt because they want and need to keep their citizens busy manufacturing wares for trade. China’s investment in US assets becomes very important in keeping the yuan devalued by comparison to the dollar to promote exports. This lending will continue but at a reduced level as demonstrated by the central government commanding Chinese banks to stop lending to US banks. Losses that may occur from US assets are far less of a worry to Chinese leadership than workers’ idle hands. The Chinese have become dependent on US consumers for job creation in exports and have repressed labor to keep wages artificially lower than they would be otherwise. Although these measures have been taken, the financial crisis is still causing China unemployment problems that the central government fears. Recently, protests have occurred over unpaid wages and job losses, the government so far has been able to calm the citizenry, but they are well aware that the unrest will continue as long as the financial crisis does unless something is done. To maintain growth and stability the Chinese have announced a $586 billion economic stimulus for their economy due to reduced trade and investment.

It is this type of action combined with the halting of lending to US banks that signals a changing relationship between China and the US. China appears to be moving beyond the reform period and our relationship should now focus on maintaining trade relations based on agreements and dispute resolution through the World Trade Organization and short term and long term goals set in the Strategic Economic Dialogue. China’s changing role, becoming less of a lender, and the decrease in cross trade and investment may also quell voices in our government calling for punitive legislation. These proposed policies do not enhance our trade relationship, and if put into action will negatively affect larger sectors of our economy that benefit from cross trade and investment with China. The political rhetoric in the US tends to focus on US producers versus Chinese producers. In reality, the situation is much more complicated.

With this in mind, President-elect Obama should continue the current trends of constructive dialogue with China and discontinue his rhetoric that, “They’re neither our enemy nor our friend. They’re competitors.” We should recognize that for the past 30 years, trade has been the vehicle for US-China bilateral relations. If he desires that, “…we have enough military-to-military contact and forge enough of a relationship with them that we can stabilize the region. That’s something I’d like to do as president,” then the President-elect should view the US-China relationship not as competitive, but as collaborative. As Chinese president Hu Jintao’s message of congratulations to President-elect Obama stated, “Developing long term, healthy and stable Sino-US relations serves the fundamental interests of both countries and peoples, and is of great significance to peace, stability and development in the world.”