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PLA Threatens Chinese Economy

Posted By Derek Scissors and Dean Cheng On February 11, 2010 @ 10:45 am In Ongoing Priorities | Comments Disabled

Chart [1]

China’s People’s Liberation Army (PLA) this month has been trying to threaten the U.S. economically. However, their plan could actually harm China, not America.

Many, many Chinese see reunification with Taiwan as a deep emotional issue. But much of the PLA sees it as a way to pad the military budget. Any attention to Taiwan has Chinese generals demanding some sort of strong action or another, while naturally observing that the controversy justifies more money for them.

This happened again with the recent announcement by the Obama Administration that it will provide limited arms to Taiwan. The PLA trotted out its most bellicose officers. These worthies promptly argued, among other things, that China should respond to the arms sale with a bond sale, selling down holdings of American bonds [2].

Bring it on, guys.

The idea that China has important influence over the United States through its bond holdings is a myth [3]. If a picture is worth a thousand words, the graphic to the right should be particularly valuable.

There are only two real economic possibilities:

1) China sells bonds, for a purely political reason, and finds strong demand from everyone else, here and around the world.

China then holds less U.S. government bonds and others (American banks, the Japanese government, ordinary people, and so on) hold more.

2) China tries to sell American government bonds, for a purely political reason, but no one else wants them. Even in this case there still is no threat to the U.S.

That’s because China’s attempted sale has nothing to do with the U.S. economy. People and countries do not buy American bonds because China does, they buy because it’s the best financial option for some particular amount of money. How good an option it is changes with economic conditions, such as our horrible budget deficit. But how valuable U.S. government bonds are does not change because the PRC is throwing a tantrum about Taiwan arms. Other buyers of our bonds will ignore this, and there’s even a fun twist.

If the Chinese government actually listened to PLA bluster and made a grand announcement about selling bonds, they might feel they have to follow through or lose credibility. But in the case of no one wanting them, that will not work at first.  To find buyers, China would then have to cut the price and take losses on the bonds.

If that opportunity were to arise, The Heritage Foundation suggests that the Department of the Treasury buy the bonds at the lower price saving taxpayers a bit of the money the U.S. government is wasting. At the end of the day, China could have done the U.S. a favor.

Thanks for the help, PLA.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/02/11/pla-threatens-chinese-economy/

URLs in this post:

[1] Image: http://www.heritage.org/Research/AsiaandthePacific/images/b2366_chart1.gif

[2] China should respond to the arms sale with a bond sale, selling down holdings of American bonds: http://www.reuters.com/article/idUSTRE6183KG20100209

[3] The idea that China has important influence over the United States through its bond holdings is a myth: http://www.heritage.org/Research/AsiaandthePacific/bg2366.cfm

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