Shadow Government

Channeling Martin Luther King Jr.: What Obama should give Hu

Most years during the Martin Luther King, Jr. Day weekend, I re-read a few of his sermons, as a way of reflecting on his legacy. This year, I read a passage in one of those sermons that seems especially timely:

Christianity insists that man is an end because he is a child of God, made in God's image.  Man is more than a producing animal guided by economic forces; he is a being of spirit, crowned with glory and honor, endowed with the gift of freedom."

King titled this sermon "How should a Christian view Communism?" and in it he distinguished between the communist and Christian views of the human person -- the latter holding that all human beings are created in the divine image and thus "endowed by their Creator with certain inalienable rights," in the words of the Declaration of Independence. Though King's primary devotion in his too-short life was to the civil rights struggle in the United States, he constantly connected this effort with the universal aspirations of all human beings to realize in fact this liberty and dignity. And as he spoke out against the human rights depredations of communist governments, he also condemned the hypocrisy of his beloved America in fighting against communism abroad while denying basic rights at home to a class of its own citizens. 

The communist ideal largely perished with the end of the Cold War, and exists now only in a few flickering embers in isolated outposts such as North Korea. But one of communism's cardinal flaws -- this belief that human beings are subservient in value to the State -- persists still today in too many authoritarian nations.

This past week alone witnessed considerable ferment in the cause of freedom. The news was not all good. In its invaluable global assessment of each country, Freedom House found 2010 to be the fifth consecutive year of retrenchment for human rights and democracy. The proximate cause is the persistence of authoritarian governments who see their citizens as mere subjects of the State, but the report is also an indictment of sorts on the democratic governments of the world -- including the Obama administration -- for doing too little to support liberty beyond their own borders.

Yet in the same week that Freedom House issued its grim assessment, other signs told a better story. In an act unprecedented in the modern Arab world, the people of Tunisia rose up and rejected the autocratic rule of President Zine al-Abadine Ben Ali. And in a Middle East speech rather unprecedented for the Obama administration, Secretary Clinton traveled to Qatar to deliver a bracing call for reform, progress, and yes, freedom in the Arab world. Nor were these concerns confined to one region, as the next day she issued a stern and specific exhortation to China to respect the political and religious rights of its people. In this same week, President Obama began taking tentative steps to put deeds behind his words as he met at the White House with a group of activists dedicated to improving human rights in China, in advance of President Hu Jintao's state visit.

Does all of this signal a tidal shift in the sea of liberty? A few anecdotes from one week are too little and too soon to tell. As notable as the president's ouster in Tunisia was, the ongoing instability, violence, and rapid power shifts from the prime minister to the speaker of parliament foretell an uncertain future, and are a reminder of the fragility of democratic transitions.  Moreover, as much as the people of Tunisia sent a jolt of inspiration across the region, the persistence of autocratic regimes in Arab countries testifies to their resilience in resisting reform. And as welcome as these latest gestures from President Obama and Secretary Clinton are, they come after two damaging years of comparative indifference by the administration to human rights and democracy -- an indifference that was as dispiriting to global democracy activists as it was reassuring to their oppressive governments. 

Yet it is never too late to do the right thing. And this week of honoring Martin Luther King Jr.'s life provides occasion for rededication to his legacy as well, especially as we have a president who embodies much of what King envisioned.   

As my Shadow Government colleague Mike Green pointed out in his excellent preview of the Hu visit, China's imprisonment of democracy activist and Nobel Peace Prize winner Liu Xiaobo means that the White House meeting this week will be "our first summit (indeed, our first state visit) between a Nobel Peace Prize laureate and a world leader who is imprisoning another Nobel Peace Prize laureate." Martin Luther King Jr. also won the Nobel Peace Prize, in 1964. So here's an idea for President Obama this week, as a gesture on behalf of human rights, religious freedom, and China's imprisoned Nobel Peace Laureate: Why not present President Hu with a book of King's sermons?

Shadow Government

Checking China's white knight

In the lead-up to President Hu Jintao's White House visit this coming week, China analyses abound. I will leave the question of whether the United States and China are careening toward a new cold war to Dr. Kissinger and focus instead on the underlying irritant of China's foreign exchange reserves.

This week brought news that those reserves had grown to $2.85 trillion, up almost 19 percent over the last year. This followed stories about how China was riding to Europe's rescue with the promise to buy Spanish bonds and asking whether China might serve as Europe's white knight. Both reports seemed to support a narrative in which China's mercantilist approach has given it the resources to take a leading role in world affairs. In fact, each illustrates some of the pitfalls to the Chinese way of doing business.

First, is China saving Europe? The story spoke of a rumored $8 billion Chinese purchase of Spanish bonds. According to one Citigroup analysis, Spanish government financing needs through the end of 2012 total 467 billion euros (about $625 billion). The alarming thesis of the Citigroup report was that if doubts about government finances spread from Greece and Ireland through Portugal to Spain, the funds the other European governments have pledged to address the crisis so far would be insufficient. If China is to serve as Europe's white knight, an $8bn bond purchase would be a very feeble joust.

There's always the possibility, of course, that a token investment of this sort could send a signal to other investors: if China has confidence in Europe, why shouldn't we? Unfortunately, China's track record as a foreign investor has probably left it with a relatively small following. China had invested heavily in the debt of Fannie Mae and Freddie Mac in the years leading up to the U.S. housing crisis. It invested in the Blackstone group just before those shares took a dramatic fall. And though the exact composition of China's reserve holdings is not public knowledge, its presumed large holdings of U.S. bonds are subject to substantial risk; they drop in value whenever interest rates rise or the Chinese currency appreciates. Following this sort of reasoning, one estimate from last year assessed China's 2010 loss on foreign reserve holdings as between $177.0 and $211.3 billion.

That's rather a lot of money. It raises the question whether this was bad luck, or whether it is a problem inherent to China's large and growing account. I would argue the latter.  So-called "hot money" is flowing into China because China's undervalued exchange rate makes this look like a one-way bet. If an investor thinks China will be forced -- by threat of inflation and burgeoning reserves -- to appreciate its currency by 10-20 percent over the next few years, that makes a very appealing expected rate of return, particularly in a time of cheap and easy borrowing in the West. (Oddly enough, China has just decided to facilitate such flows by opening banks offering yuan accounts in the United States. The Wall Street Journal explains how and why this should be part of your portfolio.) The loser in these transactions is China, which is paying high prices now for dollars that will inevitably be cheaper in the near future.

When China tries to get around this problem by entrusting its funds to sovereign wealth funds or state-owned enterprises who will seek out higher rates of return, it faces two problems. First, there is a suspicion of Chinese government motives that stirs opposition to major investments abroad (see CNOOC). Second, there is the problem of the poker novice who walks up to  the table, puts down a big pile of cash and asks, "So how do you play this game?" When the Blackstone Group luminaries are selling, one should think hard about whether to be buying.

Of course, China could give up on the idea of making a return on its money (or even preserving value) and treat it as a giant slush fund used to curry favor abroad. But China remains a developing country, with income per person of $7,400 and substantial problems to address, as Chinese officials will readily explain. Further, past losses have drawn a backlash within China, as the public has objected to having resources squandered. This week Chinese officials publicly expressed their concern about the fate of their dollar assets.

China's rampant accumulation of reserves cannot continue indefinitely. If reserve growth continued at the rate it did for the last year, Chinese reserves would equal the size of total current reported world foreign exchange reserves in less than 7 years. The sooner China acts to stem this growth, the less painful it will be for them.

Treasury Secretary Timothy Geithner and the administration this week seemed to broaden their demands of China towards concerns other than currency -- more market access, less Chinese government intervention in the economy, better intellectual property protection. This seems wise. There is plenty to complain about and there is reason to hope that China may be more responsive on these other issues. U.S. importunings on currency have fluctuated between ineffective and counterproductive. China's undervalued exchange rate is misguided, but for the Chinese, the quixotic accumulation of foreign exchange reserves serves as a punishment, not a reward.