China is not happy. That's the title of the bestselling book in China. The five nationalist authors say it is time for China to "split from the West," particularly the United States and the Treasury bonds that Beijing holds to the tune of $1 trillion. This desire for greater distance from America is growing: in a May poll conducted by China's Global Times, 87 percent said they were against buying more U.S. debt. Shortly before U.S. Treasury Secretary Timothy Geithner arrived in Beijing in early June, a survey of leading Chinese economists showed that 17 of 23 think U.S. bonds are "risky," that U.S. stocks pose a potential threat to the Chinese economy, and that the Chinese government should diversify its assets away from U.S. markets and toward energy and mineral resources. When Geithner assured a group at Beijing University that American bonds are a "safe" investment, they erupted in loud laughter—a rare outbreak of rudeness from an elite crowd in China.
This growing spirit of independence is troubling global markets. Many influential Chinese now doubt the wisdom of seeking closer ties to the United States, a bedrock policy that goes back to 1989, with the first openings to American business. A fragile global recovery depends on China's continued willingness to fund Western and especially U.S. debts, mounting even higher now as governments pour money into stimulus packages. Anxiety that China might pull back led to a sharp spike in interest rates in recent weeks, and turned the discussion at the recent G8 summit of finance ministers away from recovery efforts and toward ways to pay down the debt amassed so far. Republican Congressman Mark Kirk, who traveled to China as a part of the U.S. delegation, said in an interview that he believed "China is beginning to cancel Congress's credit card, and doesn't want to lend much more money to the United States."
Fortunately, China's stability-obsessed rulers do not share popular illusions of independence from the American economy. President Hu Jintao and Prime Minister Wen Jiabao have made it clear they understand that sudden divorce from the United States, their best export customer and leading investor, would be self-defeating.
While Wen recently urged America to get its financial house in order, he spoke as a banker tied to his biggest creditor, not as a jilted lover headed for the door. At the end of Geithner's visit, Hu saluted the Treasury secretary for "establishing good working relations with your Chinese colleagues" and for being "committed to enhancing China-U.S. economic cooperation."
But the popular fantasy of Chinese economic independence has real-world consequences. Right until the crisis hit, China looked to U.S. businesses for guidance. Wall Street giants were going to help Chinese state banks learn the mysteries of modern banking, like how to "price risk." Now it looks as if state-run Chinese banks were the safer houses, and no one in China talks about the American model. Beijing has shelved plans to open further to foreign stock and bond traders. Populism is pushing leaders to turn inward, for example by issuing rules attached to the country's new stimulus spending requiring contractors to "buy Chinese." Globalization, a process America has promoted and profited from for 30 years, is under attack in China.
China's top leadership seems to understand. After America, no nation has profited more from globalization than China. Even with its exports to America down more than 25 percent, China will still run a trade surplus with the United States approaching $200 billion. That cash flow has allowed China to run the world's most generous stimulus program (at 4 percent of GDP) and to weather the global storm relatively well. No wonder Beijing has so far made only half-steps to diversify away from the dollar, as that would make it more difficult for Americans to buy its exports. Chinese banks are now buying shorter-term U.S. debt rather than 10-year and 30-year bonds, suggesting they want neither a crisis in the near term nor greater commitment to U.S. investments in the long term.
To do more for America now would be risky. One argument of the "China is not happy" contingent is that the ruling elite has been corrupted by close ties with the United States and has been seduced by Western goods. Those arguments have been echoed in thousands of blogs available to more than 300 million Chinese Netizens, which are followed by Chinese officials and constitute a form of "cybernationalism." That puts pressure on the government to encourage the growth of dominant Chinese companies that can supply appealing brands to Chinese customers rather than depending on famous American names.
Some recent government moves can be read in part as attempts to appease the independence movement. Beijing prevented Coca-Cola from purchasing Huiyuan, a popular fruit-juice maker, for $2.3 billion, ostensibly on the grounds that it would stifle competition. Other American companies have found that Chinese authorities have been less accommodating of late. Avon, which has had stellar success in direct sales of cosmetics in China, is now under investigation for irregular practices by its agents, which may be the case but is more likely a sign of official displeasure with the prominent positions of foreign brands in the domestic marketplace. And in June a Chinese consortium bought GM's Hummer division, a sign of growing ambition for domestic control of consumer brands rather than simply allowing U.S. companies to dominate the Chinese market.
Still, there are limits to how far China can turn inward before it gores itself. The factories built and run by the likes of Intel, Nike, General Electric, and even the woebegone General Motors have been a source of employment, and account for a big share of the boom in exports from China. Beijing is not going to cut off its biggest foreign investors, nor is it going to shut down its own investments in America. No other market can absorb China's reserves. Consider: when Morgan Stanley recently issued new shares to pay back its loan from the U.S. government, the China Investment Corp., a sovereign wealth fund, bought 44 million shares for $1.2 billion. That purchase attracted little notice but represented a startling contrast to the popular rhetoric of hostility toward investing in America. Indeed, not all the blog posts in response to China Is Not Happy endorse its nationalist vision. As one put it, "This kind of book is always the type that blames everything on Democracy and is of absolutely no use whatsoever. It's a load of rubbish! You're not happy? Who the hell made you unhappy?! You've got money and you're still not happy! If we sort out our own problems instead of complaining about how unfair life is, then we wouldn't have businesses suffering in the economic crisis, students going unemployed and corruption." That's the reality that China's leaders must face.