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.

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

soundoff (729 Responses)
  1. TheBrow

    The USA have been all over South America ? Go back to elementary school jerk. The day you set foot in Brazil you'll see the pitiful remnants of your failed empire collapse for good !

    August 15, 2011 at 4:56 am | Reply
  2. lucy

    Fareed Zakaria is an indian-American, who does not like China, due to the economy of China increases fast than India, he always deliberately smears China.
    I really can not believe what he said.

    August 15, 2011 at 4:59 am | Reply
    • Klaus

      I really don't think that Zakaria "always deliberately smears China". I read some interesting Zakaria articles on Chinese politics. But he really should not comment on economics, never! If Zakaria writes articles about economics it's simply getting absurd. What a pity! I still remember his deplorable articles on economics in Newsweek.

      Now Zakaria even mentions the actual mutual U.S.-Chinese dependency, but according to Zakaria, in the end the debtor (the U.S.) is doing the creditor a favor. In fact the U.S. depend on China, as well as China still depends on the U.S. That was true in the past, and it's true until now. But things are changing right now:

      1st: China has already started diversifying its investments (e.g. by buying shares of very large and reliable companies, Munich Re being only one example). and
      2nd China will reduce it's dependency on exports. It has already started to prepare for this fundamental change.

      That means that China will indeed slow down its purchases of American debt in the very near future. And yes, that means that the value of the U.S. Social Security trusts' and pension funds' assets will decrease significantly. It will change the balances of the global economy slowly, gradually, provided that there is no major crisis in the meantime (a significant contraction would hurt the U.S. as well as China).

      I still remember Zakaria's articles and comments about the financial crisis in Newsweek in 2007/2008. I remember it very well: it had all been proven wrong, and even absurd.

      August 15, 2011 at 5:33 am | Reply
    • NorCalMojo

      Intelligent Indians see that the free trade policies that have helped them grow for the past decades are under immediate threat. They also see that when the change comes, India will be losing most of their client list along with China.

      Americans are tired of watching jobs leave the country. A course correction is coming.

      Both nations should stop worrying about America and start scrambling to build up their middle class with enough consumer power to sustain their own economies when the US gravy train grinds to a halt.

      August 15, 2011 at 10:03 am | Reply
  3. Mike

    One aspect of the US economic downturn that is staring everyone in the face, but which no one seems to mention is the loss of international goodwill by America's self serving inane policies. Globally, investors are turning away from the US giving rise to the so called BRICS countries..

    The sheer disdain which this and previous US administrations had for foreign input/viewpoints on global issues, like trashing of the UN, abrogating age old treaties combined with arm twisting (freedom fries anyone) by the US on issues like the invasion of Iraq, Guantanamo, torture, renditions etc. has driven a deep chasm between the US and the rest of the world.

    The US economy thrived exponentially (solely in some sectors) on international goodwill and global respect that brought in immense investments into the economy which now, thanks to Bush/Cheney and Obama's continuation of those foolish unilateral policies has brought America to its financial knees.

    August 15, 2011 at 5:01 am | Reply
  4. GarryJoe

    As a Chinese, I feel ashame of China Chinese...the west especially the US have been sharing with them technoogies and skills, allow them to prosper by opening up their universities, and most important the US market. China has gone fat at the expense of the west. When the west gets into trouble, China become boastful and arrogant, not knowing that if the west just stop buying anything from them, they go down the abyss too. What fair weather friends they are !

    August 15, 2011 at 5:05 am | Reply
    • d

      if you are chinese...than u r a chinese american...because u r one of those self-hating chinaman

      August 15, 2011 at 6:58 am | Reply
      • GarryJoe

        Dear d,
        I am not an american, in fact, i hail from south east asia. I know how chinese think, and am not flattered for my own race lack of spiritual principles.

        August 15, 2011 at 9:54 pm |
  5. atagirl

    @Klaus – Good points. Why do these financial reporters get everything so dead wrong, are proved wrong, yet they continue to make a living blathering to the public? As a younger woman, I used to follow msns Jim Jubak and it really irks me to see him continuing as an msn/nbc appointed financial guru after he wholeheartedly bought into the intenet bubble and encouraged the rest of America to run after him.

    BTW, I didn't follow the jab at Fox news. My impression has been that they are taking our American debt more seriously and are willing to say what many news outlets are suppressing, namely that we Americans do need to cure our debt addiction, on the individual and governmental levels.

    August 15, 2011 at 5:06 am | Reply
  6. lucy

    Fareed Zakaria is an indian-American, most indian, who is jealous of China.

    August 15, 2011 at 5:11 am | Reply
    • irwin

      I think Fareed is muslim? clue his name is Fareed.

      August 15, 2011 at 5:15 am | Reply
    • irwin

      on the contrary, it's most white american harping about China rise

      August 15, 2011 at 5:16 am | Reply
    • d

      he should at least try to be more subtle...esp since his last name is a dead give away

      August 15, 2011 at 7:02 am | Reply
  7. PassBy

    Well, Americans still standing proud i see.

    August 15, 2011 at 5:15 am | Reply
  8. TheBrow

    美国人是世界的主宰

    August 15, 2011 at 5:16 am | Reply
    • 2

      你讲了一个很好笑的笑话

      August 15, 2011 at 5:40 am | Reply
      • joseph

        but it's true

        August 16, 2011 at 1:54 am |
  9. Paul

    Why is intragovernmental debt included in our national debt?? It makes no sense what so ever. The Government gives itself an asset and a liability at the same time. It is meaningless and just a number that gives the Govt an allowance for it's Government programs. That is double accounting and should not be included.

    August 15, 2011 at 5:16 am | Reply
  10. Anchin

    There is nowhere else to go!

    August 15, 2011 at 5:20 am | Reply
  11. Gabriel

    Few years back, like in 2007, almoust everyone said US real estate was as safe as safe can be... which has been revisited of course. It required one of the largest financial crisis in US history, but the message got accross the human race.

    To the ones that do not see the danger of unsustainable debt in spite having right in their faces (see the paragraph on interest paid), what type of shock do you really need to see the light? Debt is good, but not without limits, and historically it may be that US debt is in unchartered watters.

    Not yet convinced? just try to experiment using your own personal finances: increase your credit card limits, keep them drawn up to the max, see what happens! Oh, some people did just that... Ask them how they feel about it! Or go see your bank about it, tell them they will get paid by your children's children – this should get the bank excited so they may suggest few fresh options...

    "Too big, too safe"? Just remember Lehman Brothers... people used to say about the same, till was just to late. History abounds in examples of the same nature – no need for another one. Not today, please.
    Mr. Zakaria has written "Post-American World", a book in which he described the sitation of the British empire full of debt after a couple of tiring war efforts... the rest is well known history. No lessons to be drawn from this one?

    I just believe repeating the same steps that have proven wrong will not yield to a much different result.

    But, before solving a problem (i.e. the huge US debt), one may first need to move out of denial and face reality. No matter how much it hurts.

    How about changin course, like steadly reducing this debt – remember the US was at its peak when it was the world's largest creditor, not its largest debtor!

    If you have not already done so, please check the site below:
    http://www.usdebtclock.org/

    August 15, 2011 at 5:23 am | Reply
    • Paul

      The United States is a country that has monopoly control of it's own currency. A country is not a person or a business. So your examples do not apply to the United States of America. We can not possibly run out of our own made up currency.

      August 15, 2011 at 5:34 am | Reply
    • buckup

      I would say the US was at its peak when it fought facism in wwII, taking on the most massive debt compared to gnp including now by 2x. Sorry we have a balanced budget amendment so Hitler wins??? Earthquake in CA, no money, leave the dead unburied?
      I would say the US was at its peak when when it went to the moon carrying the flags of our mortal enemies, if only because we see a better day, someday. That was a over budgeted debt problem, should have never done that.

      And today, it is a mixed bag like the last 10,000 years. But if we can become better people, not kill ourselves in the process, not destroy the earth, and work together to manage common threats, then we are at our peak and may last another 10,000 years.

      August 15, 2011 at 6:02 am | Reply
  12. worbobby

    I realise that I am being a bit stupid here, but is there any reason why the % totals don't add up to 100%??

    August 15, 2011 at 5:30 am | Reply
  13. buckup

    let's say it never happened. the per capita in China would would be $500/y, their infrastructure would not be what it is, we would have no concern as to their sufferring or poverty, exports to them would be blocked so they would have limited access to modern technology, food, or health...

    so what, instead we owe them money, $900/person. our debt after wwII was 2x greater per gnp/y than now. after wwII we had the cold war expense and still paid it down below present.

    people seem to forget humanity creates the concept of money. the limit is our imagination of its value and common trust. when the republicans toyed with the idea of unilaterally defaulting and destroying internationally our trust we got what we have now-> fear that the US is lazy, stupid, and willing to screw the rest of the world while it commits financial suicide because it can't compromise.

    people everywhere seem to forget we have avertred a hair trigger global nuclear war, food supplies are up for most of the world, we have better health, live longer, and complain way too much. If the Chinese have a massive earthquake, or a pandemic and we are there to help them out, how much gold or t- bills is that worth? deeds are more valuable than money.

    August 15, 2011 at 5:36 am | Reply
  14. giulio paolo pesce

    Russian Rublo could become the new TB market for China, perhaps?

    August 15, 2011 at 5:37 am | Reply
  15. Sean Greene

    One of Fareeds BEST articles. GREAT job this time.

    August 15, 2011 at 5:37 am | Reply
  16. Tony

    What a stupid theory!! The money are not measured by face value but purchasing power!!! You can only cheat those stupid people.....

    August 15, 2011 at 5:38 am | Reply
  17. leavemealone

    US guys are genius. Chinese guys a little bit stupid than you guys. ok?
    whatever, chinese guys have deep deep thought and strategy, see what will happen. Time will tell the truth.
    Argument solves nothing but gain hate. Save your words and just think long long time. Economy is much complicate than all of your imaginations. And now, it's related with politics... Don't think you are a superman, Thousand of economist's words may be a crap in front of country's politician... just doing you own favor.

    August 15, 2011 at 5:43 am | Reply
  18. David of The Chicago Tribe

    Actually, I do not agree with the author. I believe China is doing us a favor. Have any of you had the Orange Chicken over at the Panda Express??

    August 15, 2011 at 5:49 am | Reply
  19. Bill

    The United States abandoned morality for economics when extending "most favored nation" trading status to a Chinese regime that brutally represses its own people. It was a choice driven by fear, and greed. It is a shameful chapter in our history, and unworthy of us. Standing by while they manipulated their currency to the detriment of our own economic base, again, driven by fear, and greed, was also shameful.

    Washington and Bejing deserve each other now. Both are obsessed with perpetuating their own power above all. Both believe that Government intervention and control of their population is the way to a better future. The Chinese regime is increasingly fearful of their own people, and the backlash that any stall in their economy might cause.

    In both places, the seeds of revolution have already been sewn. Sadly it's probably just a matter of time now. The idea that government can give people lives that they have not earned, and do not deserve, can't, won't, and shouldn't endure. The lie will inevitably collapse under its own weight, and people will be forced to take their futures into their own hands again.

    August 15, 2011 at 5:49 am | Reply
  20. fp

    great analysis.we enjoy watching your programee for its balanced reporting.thks and all the best to you Fareed

    August 15, 2011 at 6:03 am | Reply
  21. BJ Bell

    Would I rather own gold or T-Bills - Let me think about that one and I'll get back to you.

    I"M BACK..... GOLD

    August 15, 2011 at 6:04 am | Reply
  22. Ryan

    China is not limited to t-bills with USD. They can simply buy other currency immediately. They won't hold onto USD. They are spreading the risk to everyone, so when the time comes, everyone will be slightly screwed and take an even hit.

    August 15, 2011 at 6:30 am | Reply
  23. DAVID

    Come on, boys, be mature. The truth is, if America not able to pay off the bond , you know what ll happen, like what was happening in the past two weeks, Standard and Poor’s Gomposite Index of US would drop even lower, that would lead to an disaster result in return to both Chinese and American economies, causing the serious finical crises in human histories. If American dollar lose it reputation in such crises, how can your guys expect American to stand in such leading position as it is doing now. What would happened is some Europe would take over our position like what we did to UK decades ago to UK.

    August 15, 2011 at 6:31 am | Reply
  24. Piaofu

    Chinese people are by nature and throughout history very good at trading. Nothing new in this one. America has only itself to blame for their current financial debacle. I mean Americans were buying homes which they really cant afford them. And so started the great Wall Street disgraceful near collapse which in turn induced a world wide recession.

    Now analysts are targetting China with new unfounded rumours. China dont have anything to worry about their government debts. Afterall they have almost US$3.3 trillion in foreign forex reserves alone.

    So in a liberal trading world, China is making better money in American bonds by earning higher interests – is simply good BUSINESS sense !

    August 15, 2011 at 6:33 am | Reply
  25. interested observer

    how about they spend it on their own bridges, roads, health care and retierment instead of ours?what would happed then?

    August 15, 2011 at 6:42 am | Reply
    • Rahull

      They did. We need the Chinese. Really. I mean it.

      August 16, 2011 at 3:47 pm | Reply
  26. kerem arbudak

    test comment

    August 15, 2011 at 6:50 am | Reply
  27. skeptic

    China's not doing us a favor. Does China owe us a favor?

    We can't even get the Republicans to be nice to our own people. We can't even ask the Republicans, our very own people, to be helpful to our own economy, and we have the nerve to accuse the Chinese?

    Fareed Zakaria is out of his frigging mind.

    August 15, 2011 at 6:58 am | Reply
  28. ernie

    When is enough enough? Stop buying ALL products from them for a while......at least until we owe them nothing....problem solved.

    August 15, 2011 at 7:11 am | Reply
  29. Will 18E

    At at least the communist Chinese and the GOP are in full agreement, just as they are when it comes to jobs.

    August 15, 2011 at 7:30 am | Reply
  30. dry_gin

    You all guys forgetting that China not european-american country, they have different mentality. different way to consume countries and nations.
    they dont prefer to fight (over depth or land) they prefer to intergare and slowly dissolve original polulation within greater china.
    this is how they did with mongols who captured them, thay make gin ghis khan their king and later all his other lands become under china control – same happens with US, they slowly migrate to US slowly own it and next day you'll see it will be states of USC instead of USA. same happens in mongolia, when they migrate 1 million on chneese into 500.000 mongolians, same happens even in Canada where Brithsh Columbia and Ontario is already under heavy Chineese control , you will see parts of cities where all the sings are in chineese and all the ppl are chinese.
    and China it not an evil country. they just work, they respect family and moral, they reproduse, they dont waste money.
    they just better, all russians and americans were doing is catching dreams and world domination fantasy, while chineese were working slowly toward prosperity.

    August 15, 2011 at 7:44 am | Reply
    • USA

      One of the best post ever!

      August 15, 2011 at 2:48 pm | Reply
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