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  • China Is Not America's Banker

    china-and-interest-small

    Myth: China is America’s banker.

    Truth: China has bound itself to American economic leadership.

    The federal government runs a gigantic budget deficit, which will hurt the economy for the next decade. China buys some of the bonds sold to finance that deficit and has about $800 billion in official holdings of Treasuries, plus perhaps an equal amount in other types of holdings. Even so, the conventional wisdom — that the U.S. needs PRC financing to continue our wild spending — turns out to be wrong. Partly because of the damaging jump in the size of the deficit, Chinese bond purchases have become unimportant. Official Chinese purchases of US Treasury bonds are on pace to fall below $100 billion for 2009, while the federal government deficit soars to $1.4 trillion. Yet U.S. commercial interest rates are lower than at the end of 2008, when official Chinese purchases were equivalent in size to nearly half the federal deficit. Chinese bond purchases no longer seem to matter, if they ever did.

    In addition, when Chinese bond purchases were large, it’s because Beijing had no choice. The PRC can take in a great deal of money from the world, through its trade surplus and other activities. The same rules that keep the Chinese currency undervalued means Beijing cannot spend the world’s money at home. Most foreign money disbursed at home by law ends up right back with the central government. That can leave the PRC sitting on a huge pile of dollars and the U.S. economy as the only place big and solid enough to absorb it back. China has not been lending, they’ve been investing, the only way they can.

    Finally, the bulk of China’s pile of foreign money can be traced back to the Sino-American trade gap. The PRC relies on exporting to the U.S. market for millions of its best jobs. On exactly the same lines, the PRC ties its currency to the dollar. Linking themselves closely to the American economy that way is also the best choice they have.

    In contrast, any American financial dependence on China has almost vanished.

    Posted in International [slideshow_deploy]

    14 Responses to China Is Not America's Banker

    1. Zhubajie, Hong Kong says:

      Yes, that is so very true it hurts.

      That's must be why one after another, American officials flew to Beijing to BEG, CAJOLE, and PLEAD for the commies to buy more treasuries and more papers from Freddie Mac and Jennie Mae.

      The author is so very astute in his observations it is hilarious.

    2. Evan, Washington says:

      The truth of this post really needs to be more broadly understood – the United States really has nothing to fear from China. They are not our banker, our enemy, nor a threat to any aspect of the American way of life (excluding the obvious ethical issues of human rights violations).

      A pragmatic, realist approach to China is much appreciated. Exchange rate policies, current account manipulation and trade unbalancing are no more a threat today than they were when Deng Xiaoping first began reforming China's economy.

      Great piece – and a pleasant departure from the fear mongering regarding China that has been whipped up by media outlets on the far right and the far left.

    3. Derek Scissors, Ph.D. Derek, Heritage says:

      Zhubajie:

      I don't know exactly why you characterize American behavior that way — because of one remark from Secretary Clinton? In fact, it doesn't matter.

      If American officials didn't know the facts behind this graph before, they will soon. And any thought that the US needs Chinese financing will be dispelled.

      Have a nice day.

      Derek

    4. Zhubajie, Hong Kong says:

      I just call the facts as we see them. I see the frequent flights to Beijing, and I see a thick skinned (must be very thick skinned) Geithner being laughed at when when he insisted on stage at the Chinese university that investment in American paper is "safe".

      Instead of looking at the core problem, that America as a nation is a profligate spendthrift that shows absolutely no propensity of reform, the author instead advocates that everything is alright – that the rates did not even go up despite the additional trillions pumped into the market (created by sheer fiat, backed by absolutly nothing). If you are right, there'd be a Nobel economy prize in there somewhere. And the Chinese really ought to buy something else instead – copper, iron ore, oil, whatever, rather than 2% treasuries.

    5. Spiritof76 says:

      This analysis is about as absurd as the moon made out of cheese. The Chinese are pulling back because they see the handwriting on the wall. American economy will stagnate wighted down with regulations, taxes and borrowing. Yes, the enormous and unsustainable borrowing.

      If we are independent of the Chinese, just who is buying our debt? The long term bonds are not selling- interest rates are low. Only short term bonds sell but at higher interest rates. Those have to be re-financed again.

      You have failed to note just who eactly is buying the unending debt. The Fed is monetizing the debt. We don't clearly know how much since the Fed. is a secretive organization.

      Your analysis is based on a wishful thinking that the Chinese don't matter. Worse yet, your analysis is based on the wishful thinking that accelerating the debt will have no impact anywhere else- capital markets, higher taxes etc.

      I wonder what would happen if the US inflates the dollar (as it must) with the Chinese holding all those worthless dollars? Do you think the Chinese will passively accept their poor investment? I think they would try to utilize their 3 million plus army to carve out some benfits for that investment. I wonder whether the Chinese would tell the US that they would accept repayment in natural resources, particularly energy.

    6. Derek Scissors, Ph.D. Derek says:

      The argument is that Chinese financing does not matter to American interest rates. That's what the available data say. Laughing students is probably not quite as relevant.

      There is certainly no suggestion that everything is all right. First line of the text: "The federal government runs a gigantic budget deficit, which will hurt the economy for the next decade." Everything is certainly not all right; it's just that China doesn't matter to the problem.

      On the Chinese side, SAFE was well aware, even if you aren't, that global commodities markets could not absorb $400 billion balance of payments surpluses, on top of the import purchases China was already making. Until the EU gets unified securities markets, only one country's economy is big enough for that absorption. The surplus fell in 2009, meaning less money had to pile into American bonds.

    7. Tom McKinney, Dunwoo says:

      In 2009, the banker to America was the Federal Reserve!! Kindest regards, Tom McKinney Dunwoody, Georgia

    8. Derek Scissors, Ph.D. Derek, Heritage says:

      Spirit:

      Nice to hear from you again. Obviously, the piece wasn't worded properly because two readers have drawn the conclusion that I think the deficit is fine. The first sentence says otherwise. So does "wild spending" and "damaging jump." But I'll be more clear on this in the future.

      You're right that the Fed is buying a lot of Treasury debt and will have to stop. The main buyers, however, are American citizens. US personal savings look to have increased more than $600 billion this year.

      That leaves the problem as diverting American savings from productive activities to government programs which require $500,000 to create a $50,000 a year job. That is the more important point, though not the reason for this particular post.

      By the way, the Chinese are pulling back primarily because their trade surplus fell. If their trade surplus rises in 2010, they'll buy more bonds. They don't have a choice at present. And they don't matter to our deficit, one way or another.

    9. Dale, Cincinnati says:

      During the 1980′s opinion was that Japan would soon “own” the US because of the trade imbalance. The 90′s saw the Japanese economy collapse when the US shifted to purchasing lower cost Korean goods. I expect that Korea and China can look to follow in the steps of Japan in the coming decade.

      The key issue is that most goods the US purchases from China are non-essentials available at a discount to other suppliers. With the downturn in the economy US citizens will reduce discretionary spending on non-essentials and the Chinese economy will suffer the consequences.

    10. Duane Phinney Pensa says:

      A Ponzi scheme by any other name is still a Ponzi scheme.

      One of two things has to happen, a depression or hyperinflation.

      When you have to borrow to pay the interest on the debt, it's close to the end.

    11. Louis L Cesar F Levy says:

      The concept of multidimensional war against US, that I hold to be key to understanding what is happening now comprise of course an economical one.

      This feature and comments show as indicators how this is true and how along with a psychological dimension it is obvious that Dereck is right.

      That we need to spend more consciously is obvious.

      That we must see China for what this country really is depend also greatly on our leaders psychological trends and streams of thought.

      That the NECESSITIES have to be separated from what is not can be tremendous when it comes to socio-economical behavior of the American People.

    12. Russ in Maine says:

      Dale, Where pray tell will we buy products cheaper than from China and in the volume we trade. Because something occurs in such a way in 1980 is most certainly no indicator of how things will occur under different circumstances and with different players thirty years later.That said we are also in a very bad situation financially and that seems to be sliding toward the direction of worse with each passing week.The massive amounts of paper money that this administration is printing with no backing is at some point going to blow up on us!

    13. David Noble, Orangev says:

      Looks like our "banker" has cut back on lending to us. Now that we have looked on changing "bankers" as a good thing, who is our new one?

    14. David Noble, Orangev says:

      Now that we have decided to change bankers, who is our new one going to be?

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