Peking Over Our Shoulder

The annals of Sino-American relations have seen more than a few celebrity-diplomats: Henry Kissinger, a young Richard Holbrooke, and, of course, the current secretary of state. But, unless the record has been lost to history, none has ascended to this rarefied plane of geopolitics while running the Office of Management and Budget.

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. "They were intrigued by the most recent legislative developments," Orszag says. "It was like, 'You're fresh from the field, what can you tell us?' "

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. "At some point, if you refuse to contain health care costs, you'll go bankrupt," says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. "It's widely known among [Chinese] policymakers." Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine--kind of the Chinese version of Fortune.

And so, whereas previous U.S.-China dialogues, which former Bush Treasury secretary Hank Paulson officially launched in 2006, consisted largely of discussions of international issues like trade, currency, and cross-border investment, this year's included conversations about domestic topics like health care and budget discipline. Indeed, the joint announcement that capped two days of talks in Washington actually included a U.S. commitment to "reform its health care system with the aim of controlling rising health care costs for businesses and government . . . [and] reducing the federal budget deficit relative to GDP to a sustainable level by 2013."

The language marks a shift in Sino-American relations that extends far beyond these formal meetings. For decades, while the United States has prodded China on any number of internal issues, the reverse has rarely been true, except
for the vaguest exhortations. The notion that we might take advice from a developing country--even one as large and rapidly industrializing as China--would have been a blow to our self-image, at least if it weren't so laughable. Within a few short years, though, Washington has come face to face with a daunting new reality: Not only are the Chinese raising questions about our domestic policies, but we suddenly have to listen. "The U.S. had all the answers once upon a time," says a senior administration official. "But China's not the apprentice anymore."

To appreciate the complexity of the challenge China poses, it's worth considering one of the country's best-selling books in recent years: a paranoid (and vaguely anti-Semitic) polemic called Currency Wars, written by a dubiously credentialed man named Song Hongbing. Song, who briefly worked a finance job in the United States, alleges that the Western banking establishment hatched the modern financial system in an elaborate plot to dominate the world. Europe fell first, then America. (JFK was assassinated when he tried to resist.) More recently, Japan's lost decade and the Asian financial crisis of the mid-1990s served as warm-up acts for the coming assault on China. Predictably, the Rothschilds occupy the center of the narrative.