Biden to Tell Chinese Officials U.S. Still Good Investment After Downgrade

Vice President Joe Biden begins four days of meetings, meals and tours with his Chinese counterpart today amid persistent tensions between the world’s two biggest economies over trade and currency.

The vice president, who landed in Beijing yesterday, will seek to allay concerns being expressed in China -- the biggest foreign holder of U.S. Treasuries -- that the deficit deal struck by Congress and the Obama administration earlier this month doesn’t go far enough to rein in the nation’s long-term debt and that U.S. growth will stall. Today he meets with Vice President Xi Jinping, who is set to begin assuming power from President Hu Jintao next year.

In an interview with China’s Caijing magazine published yesterday, Biden said the administration “is deeply committed to maintaining the fundamentals of the U.S. economy” so as to “ensure the safety, liquidity, and value of U.S. Treasury obligations for all of its investors.”

A day after Standard & Poor’s downgraded U.S. debt to AA+ from AAA, China’s official Xinhua News Agency issued a warning: “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” In a commentary yesterday, Xinhua said “runaway” U.S. debt was “a ticking time bomb.” Fitch Ratings on Aug. 16 affirmed its top AAA rating on U.S. Treasuries.

“The last few weeks have put a new item on the Chinese agenda,” said Jeff Bader, who was senior director for Asia affairs at the National Security Council until April and is now a visiting scholar with the John L. Thornton China Center at the Brookings Institution. “The Chinese will be looking for an explanation of the broad future of the U.S. economy.”

Biden was met at Beijing airport by new U.S. Ambassador to China Gary Locke and Chinese Foreign Minister Yang Jiechi.

Watching Hoops

Biden and Locke made an unscheduled stop at the capital’s Olympic gymnasium to take in a basketball game between a visiting team from Georgetown University, one of the most popular U.S. college teams, and another from Shanxi province.

While in China, Biden, 68, also will try to establish a relationship with Xi. After a meeting scheduled for this morning, Xi is hosting a banquet for Biden tonight at the Great Hall of the People.

“Biden will try to get a sense of Xi’s style, his priorities, his qualities,” said Kenneth Lieberthal, senior fellow and director of the John L. Thornton China Center. The vice president and his aides should be “taking careful notes on who else is in the room” advising Xi.

Wu Bangguo, chairman chairman of the Standing Committee of the National People’s Congress, hold talks today with Biden, who also is scheduled to meet with Hu and Premier Wen Jiabao while in China.

Intertwined Economies

The economies of the U.S. and China, the world’s two largest, are increasingly intertwined. China held $1.17 trillion of U.S. debt in June, according to Treasury Department data, and it relies on exports to the U.S. to help fuel its economic growth. The U.S. trade gap with China increased to $26.7 billion in June, the widest since September, from $25 billion in May. Imports from China rose to the highest level since November.

S&P’s downgrade led to a rollercoaster week for U.S. stock indexes sparking a global equity selloff that wiped out about $7 trillion from stock values. Undeterred by the decision, investors snapped up Treasuries on signs of slowing growth and a widening debt crisis in Europe. The yield on generic 10-year government debt fell as low as 2.1 percent on Aug. 10, and has declined almost 25 percent since the company said it may cut the nation’s rating on July 14.

Confidence in Stability

In the short term, analysts say, China won’t sell its Treasuries. That could change if its leaders lose confidence in the stability of the U.S. economy, said J. Stapleton Roy, director of the Kissinger Institute on China and the U.S. ambassador there from 1991 to 1995.

“China’s looking for alternatives, and to the extent that it can reduce its dependence on U.S. Treasuries it will,” Roy said.

China’s Treasury holdings, while down from their high of $1.18 trillion in October, have increased for the past three months, according to data compiled by Bloomberg.

“The vice president will be in a good position to talk about the very strong deficit-reduction package that we concluded here recently,” Treasury Undersecretary for International Affairs Lael Brainard said on an Aug. 15 conference call. “Obviously, the United States has the capacity, the will, and the commitment to tackle our major fiscal and economic challenges.”

Currency Friction

Another source of friction in the relationship is China’s currency valuation. The yuan has strengthened beyond 6.40 per dollar for the first time since 1993.

Biden will “put special emphasis” on China’s currency, which “remains substantially undervalued,” Brainard said. “It’s very important for global growth; it’s of course critically important for U.S. exports and jobs.”

The yuan gained the most since 2007 last week as consumer prices in China rose 6.5 percent in July, the most in three years, and the nation’s trade surplus widened 41 percent to $31.5 billion, government reports showed.

Domestic Tension

The currency issue plays into tensions in the U.S. over trade. Senator Sherrod Brown, an Ohio Democrat, said in an Aug. 12 interview that the administration hasn’t done enough to correct the imbalance.

“American patience is running short,” said Brown, who has introduced legislation with Republican Senator Olympia Snowe of Maine to address the value of the yuan. “We’ve allowed China to basically finance their economy with exports to us, and we continue to allow that to happen.”

According to a June study by the Washington-based Economic Policy Institute, which studies issues affecting low- and middle-income workers, if the yuan and satellite currencies were revalued to their equilibrium levels, U.S. gross domestic product would increase as much as 1.9 percent and as many as 2.25 million U.S. jobs would be created.

Caterpillar Growth

Caterpillar Inc. (CAT) Group President Rich Lavin, whose responsibilities include emerging markets, said the world’s largest construction- and mining-equipment maker, is growing “aggressively” in China.

The Peoria, Illinois-based company, and its dealers have almost 20,000 employees in China. With 16 manufacturing facilities in place there, the company is either breaking ground or has already started construction on almost half a dozen more.

Still, Lavin said China needs to make it easier for U.S. businesses.

“We welcome competition but we just want to make sure the playing field in China is even for U.S. competitors,” he said in an Aug. 11 interview.

After Beijing, Biden will visit Chengdu, in southwestern China, and travel to Ulan Bator, Mongolia. The nine-day trip will end in Japan, where Biden will reaffirm U.S. support for the country as it recovers from the March earthquake and tsunami that led to radiation leaks at Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant.

North Korea and Iran’s nuclear weapons programs; security issues in Afghanistan and Pakistan; improving the protection of intellectual property rights; Taiwan, Tibet and human rights will all come up during the China segment of the trip, said Daniel Russel, senior director for Asian affairs on Obama’s National Security Council.

Those issues will take a backseat to economic concerns.

“The economy will be topic one, two, three, and four,” said Daniel Sneider, associate director for research at the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University. “And I don’t suppose the Chinese are unhappy about finding themselves in a position where they can lecture us about our profligate ways.”

To contact the reporter on this story: Kate Andersen Brower in Washington at kandersen7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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