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Renmin University professor Jin Canrong has Washington’s attention. The senior director for China at the US National Security Council, Rush Doshi, cited him two dozen times in a new book entitled “The Long Game: China’s Grand Strategy to Displace American Order.”
Professor Jin’s warning on Friday at the “Observer” (guancha.cn) website that US inflation might lead to the bankruptcy of the US government will be read carefully in Washington – especially because Jin claims that China can help America out of its economic problems.
“The United States is in a state of mental transition,” the Chinese academic averred, citing the late Elizabeth Kübler-Ross’s five stages of grieving: denial, anger, bargaining, depression and acceptance. America was in denial three years ago, and shifted to anger, but “some sane people may be ready for the third stage,” and “be ready to bargain.”
“China should calm down,” Jin added, “do well at home, and keep Sino-US relations combative without breaking down.”
China’s exports to the United States in 2021 stabilized well above the long-term trend line, at an annual rate of about $550 billion. The above chart shows Chinese data for exports to the US (these are more accurate than US data, because many US companies routed Chinese imports through other countries to avoid tariffs).
The data is seasonally adjusted using the standard TRAMO algorithm on the Eviews econometrics platform. Shown on the same graph (right hand scale) is China’s net foreign asset position, which rose by a trillion dollars during the past two years.
American factory capacity can’t begin to meet the demand created by about $5 trillion of consumer stimulus, and American consumers turned to China’s robust supply chain for consumer electronics and just about everything else.
The United States needs Chinese imports, and it also needs China to reinvest its export earnings in American capital markets, as I argued in Asia Times last month (“The Enduring Triumph of Chimerica,” June 15, 2021.
America’s dependence on Chinese imports is stunning. Americans spend about $2 trillion a year on consumer durables and $500 billion on apparel, so their imports from China account for roughly a fifth of total spending on these items.
The Biden administration is attempting the fiscal equivalent of sucking a golf ball through a garden hose. There simply isn’t enough production capacity to meet the demand, and American industries show scant interest in adding to it.
America invests about as much in manufacturing as it did in 1996 after inflation, and America simply can’t meet the demand. CapEx for the industrials sub-index of the S&P 500 is expected to languish at 30% below the 2019 level (“US quits capex as inflation squeezes margins,” July 24, 2021).
The outcome is the worst durable goods inflation on record. During the past three months, the annualized rate of change of the durable goods component of the Consumer Price Index (CPI) spiked to around 50%.
That number was turbocharged by a jump in vehicle prices, as the chip shortage cut into auto production and rental companies bid aggressively for used cars.
Nonetheless, chips aren’t the only thing in short supply. Every available survey of manufacturing shows input costs rising at the fastest rates on record.
In the past, Professor Jin observes, “the United States had high growth and low inflation. The core reason is that China has joined the world division of labor system led by the United States, and continues to provide the United States with more and more affordable and good quality products.”
Jin’s observation is not controversial: The fall in US consumer durables prices during the 2010s coincided with a decline in the price of manufactures imported from China.
But Jin adds: “Now the United States has issued a massive amount of excess currency due to the epidemic, and the amount of currency issuance far exceeds the normal needs of economic development, so there is a situation in which more currency is issued but production cannot be restored. Inflation in the United States is rising, which will put a lot of pressure on the US finances. The US federal debt is approaching $30 trillion.
“What does this imply? At present, the interest on US Treasury bonds is more than 1 point, and the annual interest payment is about $300 billion US dollars, which is considered to be affordable. But if inflation approaches 5% or even exceeds 5% (interest rates will definitely follow after inflation exceeds 5), then the United States will need $1.5 trillion a year to repay the interest of 30 trillion federal treasury bonds, which will definitely lead to the bankruptcy of the government.”
Jin continued: “So the United States is actually looking to China now. You may have noticed that in the past, the United States has always said that China manipulated the RMB exchange rate and artificially lowered the RMB exchange rate. However, recently, the tone of the United States has completely changed… Why don’t you ask for appreciation? Because our things become more expensive as soon as the renminbi appreciates, and the United States must import our goods, and that adds to inflationary pressure.”
Biden’s Treasury Secretary Janet Yellen said some weeks ago that tariffs on Chinese goods had hurt American consumers, Jin noted, adding that “it is very likely that Yellen will cancel the tariffs imposed on China by Trump within this year.”
“We are also facing inflationary pressures,” Jin said, “but because our production has resumed and the supply of products is sufficient, we can manage inflation pressures better. The United States is not so easy to manage. They need us to provide goods. Otherwise, you won’t be able buy anything with so much money, and eventually money will become gold coupons.”
These considerations help explain China’s recent demands that the United States remove tariffs and technology sanctions, and drop extradition proceedings against Huawei’s Chief Financial Officer, Jin said. “The reasons mentioned above have made us very confident now. If you have enough confidence, you can make your request very frankly,” Jin told The Observer.