$205.2 billion -this is the estimated value of products US imported from China in 2008. $727.4 billion -this is the amount that the US Treasure Bill held by China as of November 2008. These two countries are no longer far apart from each other across the Pacific today. Instead, they are inter-connected more than ever under globalization. It is just like a dance - one can not leave another to continue dancing, and both are afraid of the moment when music stops.

Export vs. Import

China has put great emphasis on the export section of GDP historically because of its plentiful labor resources. To promote export even further, China is willing to keep the currency exchange-rate on a relatively low level for years.

Through years of immense export, China has accumulated large amount of current-account surplus, measuring how far a country’s export exceeds import, which equaled to $440 billion in the end of 2008, and ranked No. 1 on the world’s list. Upon this number, the US has always been the biggest contributor, who now buys more than one-fifth of China’s export products.

Save or Spend?

In addition, traditionally, the saving rate in China stays high. On the one hand, people tend to save more due to low-level social welfare; On the other hand, overseas investments are severely limited by the government. Most of the foreign currency reserve is in the central bank’s possession. Whereas in the US, the saving rate stays low not only due to variety of invest methods, but also due to the US consumption habit. China needs a place to reinvest its savings lying in banks, while the US needs foreign capital to promote its economies. At this point, these two countries are congenially in the same dance. One cannot change their dancing step without affecting the other!

Creditor and Debtor

Like those oil producing countries that have accumulated huge amount of US dollars due to oil skyrocket in the past two years, China wants to invest its US dollars in a market more mature than its domestic market to prevent future rainy days, and the US Treasury bill is always China’s first choice.

The US Treasury bill, represent the debt of US government, is a way to finance the federal fiscal deficit. According to the 2009’s budget, US will have a trillion-dollar deficit this year, which will be continually financed with the Treasury bill. Now, about 53% of the total marketable debt is held by foreign countries as of Nov 2008(The Wall Street Journal Feb 10 2009), and China alone accounts for one-fifth of the total foreign ownership.

What Leads to the Crisis?

US can not keep promoting its economics by spending more than it has. The large imbalance produces hidden trouble in its economy, and partly leads to the financial crisis today. But, it should have been stopped before it lost control. Why wasn’t it stopped? Too much foreign capital was available and there was no shortage of liquidity even when it should have been. Despite the deteriorating situation, US citizens just continued to spend and spend. Even when the Federal Reserve in the US raised short-term rates, the US longer term rates still declined. The flood of foreign capital caused the US economy to lose its ability of self-adjustment, and the market boomed to an irrational level due to this excess available capital.

To Buy or Not to Buy

Foreign capitals are in a quandary here. For example, China, buying millions of US debt every week, is afraid of depressing the price when dumping it in huge amounts. Said another way, if it fell too far because China sold US debt, it would hurt China too. Although it needs to pay its own $600-billion-bailout, China has to keep buying US debt now and in the future. When China becomes the biggest creditor of the US, it has to be concerned more about the US than itself, since China and US are in the same dance and neither can leave abruptly without making the other partner fall down.

How About the Future

Maybe in the future, the US should try to balance its spending with earning, and rely less on foreign capitals to stimulate its economics and to boom its market to an irrational high level. When the storm finally comes and capitals run all the way back home to help their own markets, US economics can be still left strong and stable. China also has to try not to rely too much on export now. Many factories have already been closed down due to declining orders worldwide. China should consider developing its domestic consumption to avoid another embarrassing situation that when Dow Jones declined about 50% in the center of the storm, while CSI300 declined even more than 70% across the Pacific.

However, just like a dance, it must be awful to stop dead in your tracks before an audience. So it’s better to take time. “China might think Americans should save more but only as long as that did not curb their spending on Chinese imports. America would ask China to revalue its currency and boost its domestic demands. But it was also keen for China to keep buying its public debt”.(The Economist Jan 22 2009) Just like what Hillary said in Beijing during her four-nation Asian tour this year, “We are truly to rise or fall together”. I don’t know whether she is good at dancing. At least, she knows it’s a dance for two.

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