The origin of Hamilton Project

Hamilton Project initiated in 2006 was kicked off from the concern that the ‘twin deficits’ of America could cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. Because the government deficits of the US heavily depended on bond buying from abroad, the loss of confidence may incur foreign buyer to stop buying bonds, which would lead to the dollar depreciation, interest rate and inflation shot up, stock market collapse, consumption down. The recession of the US would spill over the border and cause repercussion across the world.

Clinton administration had midwifed China into globalization to make them a biddable stakeholder of world order: rule of law, human right, and democracy.

However, China defied such expectation. It signaled its intent not to abandon its one-party leadership (Tiananmen crackdown of 1989). It decided who would invest and on what terms. It controlled movement of funds in and out, allowed the PBoC to fix its exchange rate since 1994.

China pegged yuan to dollar as other EM countries did. However, China pegged its exchange rate too low, not too high as opposed to other EM countries (When international investors loose the confidence, overvalued currencies collapse, reserves of central bank drain, no other option remains but to let the exchange rate goes up, acute devaluation causes bankruptcy). -> Cronies of political and business elites garnered huge profits because of trading profits but the people of China suffered from inflation.

With depreciated Yuan, China could have enjoyed large amount of current account surplus. To counteract to appreciation pressure stemmed from current acount surplus, PBoC had to buy dollars and sell yuan by printing out money to sustain pegged exchage rate. Also, to prevent inflation, Chinese authorities ‘sterilize’ the money by urging Chinese banks to hold a large precautionary reserve.

Such being the case, Chinese holding of huge amount of US Treasury and substantial amount of trade deficit could be a potential threat to the security of US, if China opt for weaponizing its US assets. However, if dollar depreciates and interest rate skyrockets, the repurcussion could reach out China too: its US market erodes and the its assets value drops.

#Crashed #Adam Tooze #US-China relationship #US Economy #Chinese Economy