August 14th, 2011
02:00 PM ET

China's not doing us a favor

By Fareed Zakaria, CNN

What struck me this past week was China's reaction to our credit downgrade. Its state-run media thundered that America needed to "cure its addiction" to debt.

A Hong Kong newspaper widely read on the mainland ran a front page with a banner saying "The American Dream is Over."  It went on to report that Washington owes every single Chinese citizen 5,700 Yuan - about 900 U.S. dollars.

Another editorial said Washington's solution to its debt time bomb was to make the fuse one inch longer.

That kind of commentary has hit a nerve with the Chinese people. After a drop in Shanghai's stock market, bloggers took to local social media sites. One wrote: "The U.S. suffered a downgrade, why did we become the biggest victim?" Another said: "It was a huge mistake to buy U.S. bonds with Chinese taxpayer money. We must hold those who are involved responsible."

Here in the U.S. you hear many people worry that the Chinese government might stop buying American T-Bills. I think these fears are vastly overblown.

The economic situation between China and the U.S. is the financial version of mutually assured destruction - that cold war doctrine of nuclear deterrence. If you destroy me, I will destroy you.

Let me explain. I'll start with the facts. China is indeed America's biggest foreign lender - it owns about 1.2 trillion dollars of debt - more than Japan, the UK and Brazil.

A little-known fact is that most of America's debt - 14.3 trillion and counting - is owned by Americans in Social Security trusts, pension funds, and by the Federal Reserve.

But it is the marginal buyer that matters, so China is important. Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds. This is a huge hypothetical - but let's play out the disastrous chain of events that would happen if China began to divest.

It would trigger panic selling of the dollar. That would in turn hurt the U.S. economy, which is China's number one export market (not a good idea if you are the Beijing government trying to keep workers occupied in factories across China).

China is addicted to a strategy of export-led growth, which requires that it keep its goods cheap. This means keeping its currency undervalued. That's why it buys dollars.

But could China stop or slow down its new purchases of American debt? Yes, but even here, it has fewer options than people think. As China's export growth continues, it will keep adding to its foreign reserves of 3.2 trillion dollars. Where can it park that money? Does it want to invest in Japanese debt and make the Yen a reserve currency? Anyone who understands the deep animosity between China and Japan will see that this is unlikely.

Euro-denominated assets are a possibility - but there's really no such thing as European Treasury bonds. And even then, do you really want to put all your eggs in the euro when the future of the currency looks more shaky than ever before? Can you be confident that it will even be around 15 years from now?

As for British pounds and Swiss francs, you can buy those but just not in the vast quantities that China needs given the cash it generates.

And of course, if China were to stop buying Treasuries, the value of the Yuan would rise, Chinese exports would become more expensive and employment in China would fall.

So at the very moment China's bloggers and state-run media were blasting the U.S. government for its profligacy, guess what Beijing was doing?

It was buying U.S. Treasuries.

The reality is that China is trapped into a cycle of buying our T-bonds.  No matter what any ratings agency says, no other bond market is as big or as safe.

So ignore all those theories about China doing America a huge favor. The reality is, they have nowhere else to go. We're probably doing them a favor.

And by the way, in terms of who is paying whom, data from the Congressional Budget Office shows that the U.S. pays out some 74 million dollars to China in interest payments on debt every day. We did the math. That means Washington is paying Beijing 833 dollars every second.

For more of my thoughts through the week, I invite you to follow me on Facebook and Twitter and to bookmark the Global Public Square.

Post by:
Topics: China • Debt Crisis • Economy • From Fareed • GPS Show • United States • What in the World?

soundoff (718 Responses)
  1. 25 amp fuse

    Magnificent web site. Lots of helpful info here. I'm sending it to some pals ans additionally sharing in delicious. And obviously, thank you for your effort!

    June 13, 2012 at 9:58 pm | Reply
  2. invidovareday

    The narconon drug rehab method is the most famous and efficient drug rehab treatment method. This course makes an attempt to address the thoughts more than the body. Gurus have noticed that most drug addicts are drawn to medication simply because they suffer from an inferiority difficult in order to find it very difficult to fully stand up for him self. They try to overpower this problem by relying on unneccessary use of medication which they think will make them seem strong to other individuals. It is this perspective the narconon method tends to get rid of. Physical get rid of is simply a thing about this treatment method.
    Afghanistan is considered to get leading provider of narcotics with there being many locations opium poppy is actually cultivated
    Producing such sensible environments allows lovers to connect your good mental and emotional adjustments they generate during evidence-based therapies with all the encounters each day lifestyle Dependency on alcohol is definitely an condition that happens countless numbers every year- but having the simple fact in dependency on alcohol common myths can assist shield against the belief that alcohol dependency is really so life-threatening. Being aware what to consentrate in can continue consumers proof against alcohol addiction fabrications, and educate them around the genuine potential risks. The commonest belief is that the common alcohol addiction is someone that cannot get thus the Half inchhappy times. This is also ancestral- so not everyone posseses an defense to the possibilities of alcohol dependency that other individuals do without a doubt have. It could be realistic to point out that over time to be clear of alcohol, you possibly can delicately commence playing small amounts of alcohol all over again. This might 't be additional unsafe, as often alcohol dependency facts is actually a constant topic- indicating it may affect at any time alcohol is ingested. It's actually indicated that alcoholics keep alcohol free of charge their day-to-day lives following accomplishing sobriety. According to what lots of see from fact TV shows and goes through, a different fable is that alcoholics rarely fully recover.

    June 20, 2012 at 5:27 am | Reply
  3. Amivamyhohoxy

    If you're able to do a lot more then wonderful only one day time 7 days work better lowest in your case. Going swimming is important as also does Mountain biking your work outs needn't be in the health club, have some fun to get out on this planet. Consume 8 cup of water every day – It's true that you've heard this however do not believe you are aware of the electricity guiding this SIMPLE stage. Your system contains drinking water and food for electricity when is depleted our bodies effortlessly sets out to conserve that strength. By sipping ten glass a day that you are sharing with the body that no . doesn't need to collect water nevertheless there is a completely ready provide accessible. The dilemma that now equates is opening the Losing Ideas web pages without having to pay for that programs. The good thing is, now there are how 2 eliminate it quickly websites that may give accessibility to shedding pounds strategies on the web. Totally free! It is deemed an opportunity that must not be have missed. Several must get rid of it, despite their gender selection, no matter where these are from. Obesity is a common happening which a lot of scientific studies responsibility on awful meal.

    July 21, 2012 at 5:54 am | Reply
  4. here

    Hello, i think that i noticed you visited my website so i came to go back the prefer?.I'm attempting to to find issues to improve my site!I suppose its good enough to use a few of your concepts!!

    July 23, 2012 at 2:01 am | Reply
  5. Easter Cupcake Ideas

    I've been surfing on-line greater than 3 hours these days, yet I by no means discovered any fascinating article like yours. It?s lovely value enough for me. Personally, if all webmasters and bloggers made excellent content as you probably did, the web will be a lot more useful than ever before.

    August 16, 2012 at 6:30 am | Reply
  6. Contracting Info

    Hello my friend! I want to say that this article is awesome, great written and come with almost all important infos. I would like to peer extra posts like this .

    August 29, 2012 at 5:08 pm | Reply
  7. social exposure

    Excellent beat ! I would like to apprentice whilst you amend your site, how can i subscribe for a blog site? The account helped me a acceptable deal. I had been tiny bit familiar of this your broadcast offered shiny transparent idea

    September 11, 2012 at 11:37 pm | Reply
  8. best free checking banks

    Useful information. Lucky me I found your web site accidentally, and I am surprised why this coincidence did not happened in advance! I bookmarked it.

    November 11, 2012 at 8:02 am | Reply
1 2 3 4 5 6 7 8 9 10 11 12 13

Post a comment


CNN welcomes a lively and courteous discussion as long as you follow the Rules of Conduct set forth in our Terms of Service. Comments are not pre-screened before they post. You agree that anything you post may be used, along with your name and profile picture, in accordance with our Privacy Policy and the license you have granted pursuant to our Terms of Service.


Get every new post delivered to your Inbox.

Join 5,028 other followers