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Re-examine US role in time of financial woes
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Besides being disastrous for the US, the US subprime mortgage crisis has also adversely affected China's economy. However, it also presents an opportunity for Americans to gain a more sober understanding of China.

The US subprime crisis broke out in spring 2007. It led to the Federal bailout of leading mortgage lenders Fannie Mae and Freddie Mac earlier this month. A week later, the investment bank Lehman Brothers filed for bankruptcy, and Bank of America said it would acquire Merrill Lynch lock, stock and barrel for $50 billion.

The US Treasury's intervention in the rescue of the two mortgage giants indicates that the US mortgage market is still deteriorating. According to official statistics, US property prices, as well as consumer confidence, are still falling.

A recent public survey showed that 63 percent of Americans have cut back on their spending, 78 percent are shopping less, and 52 percent have reduced their frequency of eating out. Car sales have dropped to the lowest point since 1992.

Wall Street thrives on financial innovations, but as "securities guru" Warren Buffett said, the subprime mortgage was a glass of poisonous wine concocted by the US financial industry. They not only drank it themselves but also offered it to others.

American financial institutions sold the subprime mortgages through mortgage-backed securities (MBO) and collateralized debt obligations (CDO) to their European, Japanese, Canadian, Chinese and Indian counterparts. The confirmed losses worldwide have reached $395.8 billion, while estimated losses stand at about $995 billion.

A World Bank senior expert has warned that the US subprime crisis could drag the world economy into a depression. There is no doubt the US subprime meltdown has had a tremendous impact on China, especially on China's exports. But it is the country's banks that bought MBOs and CDOs that have suffered the most losses.

Former US ambassador to China Jim Sasser once told me that the US subprime disaster could actually prove to be a good thing for China because it will make Americans realize that the cause of their country's economic woes was of their own making rather than the renminbi exchange rate. This has reduced the political pressure on China.

In the past few years the US Congress has passed many bills trying to force China to raise the exchange rate of its currency against the US dollar. Some lawmakers have alleged that the renminbi's low exchange rate caused the US economic imbalance.

Now we know the real cause. Where were all the financial experts when the US economy deteriorated to its current state? Shouldn't US economic regulators be held responsible for this mess, too?

At the fourth China-US Strategic Economic Dialogue in June, the two sides did not discuss the renminbi exchange rate but focused on cooperation in energy resources, environmental protection and mutual economic investment instead.

Forcing renminbi to appreciate will not be a key issue for the US side when it prepares for the fifth China-US Strategic Economic Dialogue. That, to a certain extent, can help reduce the pressure on China's foreign trade.

Sino-US relations perfectly illustrate the saying "no pain no gain", as the two sides learn a little more about their responsibilities and duties while trying to fine-tune their relationship after each major crisis over the years. The subprime mortgage crisis has played that role, too.

While minimizing the adverse effects of the US subprime crisis as much as possible, China needs to maintain its stand and uphold its national interest on the world economic stage.

US President George W Bush said about the current crisis that there is no doubt Wall Street got drunk and is still in a hangover right now. "The question is, how long will it sober up and not try to do all these fancy financial instruments?"

If the US wants to convince the world that the current economic downturn was caused by some "unintended missteps" now is the perfect time to take the responsibility for the subprime fiasco. There just might be something good coming out of this economic calamity if the US proves it is as responsible as it claims to be.

The author,  Zhou Shijian, is a senior researcher with Tsinghua University's Center for China-US Relations Studies.

(China Daily September 17, 2008)

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