China and the financing of American debt: watch the all-important commodity-producing nations.

• Author: Hale, David

Global policymakers are once again putting China in the limelight. At the recent IMF meeting, G7 finance ministers invited the Chinese to their dinner for the first time in history. A few days later, President Bush called President Hu Jintao to discuss China's exchange rate policy. And most recently, U.S. Treasury Secretary John Snow called China's exchange rate policy "mischief."

It is not surprising that China is attracting so much attention. China continues to be the critical swing factor financing America's burgeoning current account deficit. In 2003, the central banks of Japan and China spent $400 billion attempting to maintain stable exchange rates against the U.S. dollar. The Asian central banks want to sustain a global economic equilibrium in which America's 4.5 percent share of the world's population consumes 19 percent of all imports. Since March, Japan has withdrawn from the U.S. market while China has scaled back its purchases of U.S. government securities.

The new source of funding for America's current account deficit is commodity-producing countries that have benefited from the impact of China's economic boom on their export prices. There was a capital spending boom in China last year that caused her consumption of copper, aluminum, iron ore, and other raw materials to rise to levels exceeding America's. This robust demand caused commodity prices to rise sharply and is now swelling the export income of many developing countries. As many of these countries are part of the dollar currency area, they are creating another large new market for U.S. government securities and thus helping to fund the American current account deficit.

The oil-producing countries of the Persian Gulf are likely to increase their export income by nearly $40 billion this year if oil prices remain at $45 per barrel. If oil prices hold at current levels, OPEC's total income could rise from $270 billion this year to $410 billion next year. Some of this money will be used to purchase more imports from Europe and some will bolster foreign exchange reserves. The Gulf countries have a historical link to the dollar exchange rate and thus should be a natural market for U.S. government securities. Russia has expanded its foreign exchange reserves from $75 billion last year to over $100 billion recently. It also could use its reserves to buy dollar securities. Norway will have an additional $15 billion to invest as well.

The large rise in the price of copper...