ObamaCare and What It Means For China

Now that President Barack Obama has signed into law his “historic” health care legislation, millions of Americans are trying to figure out what the new law actually means to them. Some got their answer immediately.

Even before President Obama signed the bill on Tuesday, Caterpillar said it would cost the company at least $100 million more in the first year alone. Medical device maker Medtronic warned that new taxes on its products could force it to lay off 1000 workers. Verizon, the telecom giant, warned that its costs will increase in the short term. The message from all three is clear: workers can expect changes for the worse to their health benefits as a result of this bill, perhaps as soon as this year.

Despite the fact that ObamaCare is a domestic issue, it also has ramifications for China. The two main areas where China can expect to see its impact is in trade and the value of the dollar-denominated assets it holds.

Emboldened by their “victory” in passing the bill, and concerned about having to explain why it’s good for the employees of companies like Caterpillar, Medtronic and Verizon, senators and representatives seeking re-election in November will be looking for demons. On ObamaCare, they will demonize the insurance companies. Bankers are now being demonized for causing the global financial crisis as Congress works on Senator Chris Dodd’s financial reform bill. As for unemployment, China is the demon of choice. Being tough on insurance companies, bankers and China will be seen by many as a prescription for re-election.

The first round in what is likely to be an escalation of trade tensions between China and the United States may come as early as April 15. On that date, the U.S. Treasury is due to issue a biannual report laying out its currency concerns, in which it could label China as a currency manipulator. To date, the Obama Administration has said that it believes China should allow its currency to appreciate, but has shied away from taking any action to apply pressure to the country. Congress wants to take a more confrontational approach. Last month, Senate lawmakers introduced legislation that would force the Obama administration to take action including applying tariffs against Chinese imports.

Congressmen like Charles Rangel, a Democrat from New York, are challenging President Obama to show more leadership on the issue. “Does anyone in this room actually think the Treasury Secretary will designate China as a currency manipulator,” Mr. Rangel said. Congress will take its cue from C. Fred Bergsten, director of the Peterson Institute for International Economics, who testified that a correction in the value of the yuan “would be the most cost-effective step that can be taken to reduce the unemployment rate in the U.S.” Fresh from giving the President his health care bill, expect congress to hold his feet to the fire on the currency issue.

The prospects for China’s vast holdings of dollar-denominated assets maintaining their value are a lot dimmer today as a result of ObamaCare. Last week, Bloomberg reported that, “The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.”

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Co.’s debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

For millions of Americans, it’s very difficult to relate to the trillion-dollar figures being tossed around so casually these days. However, those trillion-dollar deficits eventually turn into bonds that the government has to sell, and everyone can relate to higher interest rates. In the bond market, the greater the supply of bonds that need to be sold, the lower the price. For China, and anyone else holding U.S. government debt, it means a decline in portfolio value.

If you believe that ObamaCare will add to the U.S. budget deficit, as I’m sure China’s leaders do, this is bad news for the country’s investment portfolio.

For those of us Americans working in China, what does all this mean? It means that it will be tougher for us to do business here. A recent survey released by the American Chamber of Commerce in China showed that a growing number of American businesspeople feel unwelcome in China because of what they see as discriminatory government policies and inconsistent legal treatment. Amcham-China President Michael Barbalas said a survey of 203 members of his organization shows growing pessimism among American businesses operating in China.

And it’s about to get worse. Commenting on the Google Issue, Senator Byron Dorgan, a Democrat from North Dakota, excoriated China for its record on Internet censorship and human rights. Dorgan said the debate over an open Internet was more than just “intellectual,” but had very important, tangible implications. “China is a country that throws people in dark prisons for expressing their ideas,” he said. “This is a matter of life or death.”

No comments yet... Be the first to leave a reply!