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Guest post by: Sean Hyman Become an Author

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While there may be many promises of “change” happening in America…one thing that is definitely “changing” is the relationship between China and the U.S.

Why is this increasingly important? There are a few reasons but a couple of important ones off the top of my head are:

Just a few short years ago, China was only the 8th largest economy in the world. Now they are at least 4th and many argue that they are now the 3rd largest economy in the world. Not too shabby for a country that wasn’t even invited to G-7 meetings.

Another important reason is that they are THE largest holder of U.S. treasuries as of last September. Until then, they were second only to Japan.

While I’m a “red-blooded” American…I’ll have to say that we picked this fight. We started it even before Tim Geithner officially became our Treasury Secretary when he stated that Obama feels that China is manipulating their currency. So that puts them both in the ring with Chinese Premier Wen Jiabao.

China quickly refuted this claim that same week. However, for the first time ever, the Premier shows up at the World Economic Conference in Davos, Switzerland.

China’s first big Jab comes at Davos!

His speech, while not directly calling out the U.S., really alluded to the fact that the U.S. originator of the world’s economic woes.

My Wen blamed an “excessive expansion of financial institutions in blind pursuit of profit” a “failure of government supervision” and an “unsustainable model of development characterized by prolonged low savings and high consumption”.

I must say what the Premiere said makes a lot of sense.

We are “ticking off” our largest creditor and it’s not the smartest move we’ve ever made as a nation. While Obama will probably do a lot of great things for the economy, this is not one of them.

Not surprisingly, China says it’s “examining its investments”. Sounds like they are trying to say, “Watch it or we will pull the plug on you!”

The Chinese already haven’t been happy about their investments in Morgan Stanley, Fannie Mae, Freddie Mac and others. In fact, when many U.S. companies recently turned to China for funding, China backed away.

So while I don’t believe China will dump all of its U.S. treasuries like some say, I do think that they could still hurt us economically as they continue to climb the rungs on the economic ladder to the top.

China needs to be taken seriously and dealt with wisely. After all, they now have over $2 trillion in foreign exchange reserves…and recently, China has been sharply trimming its holdings of Fannie and Freddie debt. After making net purchases of $46 billion in the first half of 2008, they were net sellers of $26.1 billion in the five months through November and that’s according to U.S. data, not China’s sources.

Also, one Chinese government official recently told the China Daily newspaper (in December) that “Washington shouldn’t expect continuous inflows of more cheap foreign capital to fund its one-after-another massive bailouts”.

You see, for the last number of years, we’ve preached to China about how they need to become more like us here in the U.S. Now that it doesn’t seem to be working as well for us as we’d like (at the moment), this argument becomes a “hard sell” to the Chinese.

Also, China will revalue its currency when it decides to and not when we tell them to do so. Besides, what country is going to jack their currency up higher when they are facing rough economic times? They know that there is no reason put the nail in the coffin of their exporters just to pacify the U.S.

So while I’m an American, I can’t always say what we do is right. It’s sort of like “standing up for family because they are family” rather than “standing up for what is right” instead.

If we are smart, we will take an approach with China much like former Treasury Secretary Paulson took. It’s one of the things he did get right. The Chinese ended up strengthening their currency at least 15% while he was in office. Before then, we didn’t have much luck in our talks with China. So in that regard, it was smart of Bush to pick him as his choice of Treasury Secretary. While both Bush and Paulson have had their screw ups, we are now getting “wrong” the areas they got right.

To sum it all up, I think that this could undermine the U.S. dollar, U.S. treasuries and boost the price of gold.

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