America's secret deal with China

Dinesh Narayanan
Updated: May 24, 2012 02:21:14 PM UTC

The US and China have a relationship that is unlike any other in the world. One is the preeminent superpower and the other is aspiring to be one. They are extremely wary but pragmatic rivals. And they have entered into a secret deal to help one another.

China has $3.3 trillion of reserves in its coffers, the biggest in the world, and it is the US' biggest creditor. And its reserves continue to grow, albeit at a slower pace in recent months.

So what does the US do? It enters into a secret understanding with China, giving it privileged status as its biggest financier. The US Treasury department has allowed China direct access to its bond auction counter, helping in reducing its transaction costs and bypassing Wall Street to buy bonds but not sell, Reuters reported Monday. The deal helps China to command better rates.The arrangement has been in place since June 2011.

It clearly demonstrates that for the US, national interest is paramount and it will do unconventional deals to protect them. Former diplomat MK Bhadrakumar has an interesting analysis of the secret deal here. And here is another view by Prof Daniel Drezner of Fletcher School.

Can European Union have done a similar deal? China could have been the lender of last resort for Europe. An outside financier would help the beleagured nations of the Eurozone greatly and reduce their dependence on Germany, whose prescriptive attitude is hard for others to stomach. In fact, a couple of months ago at the BRICS summit in New Delhi, China had said that it was willing to fund a European rescue effort. A deal is yet to be announced though.

The thoughts and opinions shared here are of the author.

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