China Syndrome: Market's 13-Month High Just More Proof U.S. Fortunes Increasingly Tethered to China

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Behind today's happy, happy news for investors that the S&P 500 hit a 13-month high is that, among other reasons, China's industrial production soared.

More on China in a moment, but meanwhile, no one believes Treasury Secretary Tim Geithner, currently on a world tour and, as the WSJ says, "sticking to his mantra on foreign-exchange policy as the U.S. currency continues its broad downtrend." The dollar is dolor (despite a small uptick today), but there's probably a method to his madness:

Lack of major changes in his tone indicates that, while he doesn't want any dollar freefall to shake the recovery in the U.S. economy, he may find it comfortable as long as the currency declines at a manageable pace. A weaker dollar could boost U.S. exports by making them less expensive abroad, lifting the nation's growth and cutting its trade deficit.

Back to China: Check out Der Spiegel's excellent backgrounder, "Reluctant Partners: Global Crisis Makes US More Dependent on China than Ever."

Are the U.S. and China joined at the hip? Yeah, our two economies are making the springs squeak. And the two countries' inevitable spats will take on more and more importance. A divorce is highly unlikely, but everything just short of domestic violence between the two is, especially when it comes to trade issues.

Lots of evidence of the growing ties, like it or not, between the two. See the chart above and this an excerpt from Der Spiegel, which notes that China has developed a supercomputer to rival our own and adds:

China is bursting with self-confidence. The new world power sees itself as a winner in the financial crisis, with its economy growing by an impressive 9 percent in the third quarter, while the economies of the West struggle to recover from a deep recession. And while the Americans are focused on their own problems, China is expanding its influence, both in Asia and among resource-rich African countries.

China's leaders are challenging the Americans more and more aggressively, not least to demonstrate to their own population of 1.3 billion how far the country has progressed under their leadership.

How closely we're tethered to China may emerge in the continuing drama of Capitol Hill's climate bills, currently in the shadow of the health bill and so on. China's downright unfriendly to global moves on global warming, and it's actively hostile toward U.S. climate legislation. Then, to further cloud things, Congress is dragging its heels on climate legislation and is increasingly moving into the protectionist racket. Those carbon tariffs — an idea that pisses off everyone from the White House to Europe to Beijing — will be a sore point as long as the Senate has its say. Just today, Senate Finance Chair Max Baucus said during a hearing on the jobs impact of energy legislation:

"We must push our trading partners to do their part to curb harmful emissions and we must devise a border measure, consistent with our international obligations, to prevent the carbon leakage that would occur if US manufacturing shifts to countries without effective climate change programs."

That means you, China. As the WSJ's Keith Johnson notes, "The Obama administration wanted the Senate to act on climate change before the big Copenhagen climate summit, so it would have more leverage with developing countries such as China and India."

As it stands now, any U.S. protectionist measure will surely piss off our twin superpower pal, China. Hopes for the Copenhagen summit could be snuffed before it starts.