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. Badeley-Bent

    Of course, there is another possibility. The American leader could decide to create more jobs here by admitting that Free Trade hasn't really worked out and is unlikely too and change the course towards fair trade. But hey, if you're make money on all this outsourcing you probably have enough influence to keep the scam going.

    August 15, 2011 at 8:10 am | Reply
  2. Harry

    the estimated pile of cash surplus China sleeps upon is only a fantasy.
    it could hardly do them any good would they want to solve all the remaining problems they have not only with the 300 millions "rich" chinese but particularly the extreme needs of the ONE BILLION left unattended in the countryside and beaten on the head anytime they dare ask or say something.

    if the US (and Europe by the way) would only shift back to their economies 10 to 15% of all products now produced in China, that would create an absolute chaos in China, prompt the downfall of the Communist party and have most of them beheaded, in the country and in Peking : AND THEY KNOW IT!

    actually, I growingly believe that is the only perfect solution : bring back critical or technologically advanced production to our shores, increase again and seriously our employment without necessitating an absolute growth (only some products already on the shelf and sold, but recentralized in the US and Europe); and create some turbulences in China that will keep them concentrated on playing firemen at home and stop lurking outside with all their mean objectives. Then, China will be abetter place to live for 1.3 billion people and not only for 0.3 and we'll have them off our backs.

    All this by the way is not considering either the vacuum that the US will leave behind in AFPAK and neighboring muslim countries : I can easily imagine China being even further involved in trying hard cornering those problems internally with chines muslims going havoc with the help of their neighboring brothers, not to mention those from the Philippines or Malaysia or Indonesia.

    So, what China needs above all is modesty, and not this new rich arrogance, and a powerful US of A to help them find an adequate balance for the next 50 to 100 years to come : without the US, China is bust.

    The lack of world balance is the lack of chinese balance : let's not designate the wrong culprit.

    August 15, 2011 at 8:12 am | Reply
  3. OaG_sGm

    US is still and will be the most powerful world power in say the next 20 years. But I think in my life time (Im's 27 now), we may see some other country start to compete for that no.1 stop. Which country? China.

    In almost every aspect US outplays China in absolute terms right now. But if we look at potentials, (growth) and a much longer history, we know that people in China is actually capable of creating the most prosperous country in the world.

    There is old Chinese saying, 30 years in the east, 30 years in the west – meaning everything has a lifetime and life cycle.

    August 15, 2011 at 8:18 am | Reply
  4. jeff

    Americans, it seems, sure do have short memories. How quickly they have forgotten how many of their sons and fathers died in Vietnam and Korea, and how many sleepless nights they spent worrying about the cold war with the USSR. It was not that Americans hated the gentle Vietnamese people or the serious poetry and vodka loving Russian people. It was that America hated Communism !
    And now America is in bed trading with most brutal regime that has ever existed on this Planet. The Chinese Communist Party. The Party that tortures and murders its own people. The Party that persecutes gentle Christians and Falun Gong alike. The Party that spits on every human right that the American people cherish.
    Why is this happening? This is happening because Americans have turned their backs on their moral beliefs and let corporate greed take their place. And where has this gotten them? Financial disaster. What goes around comes around.
    This is just my understanding, thank you.

    August 15, 2011 at 8:33 am | Reply
    • James

      Jeff – I'm confused, other than the name, what could todya's China possibly have to do with Communism? Quite the opposite of 'Communism,' China is the free market on steroids – with little care for regulation, rule of law, or human rights. It is in many ways the complete and total opposite of communism, and far more looks like the USA of the 1890s.

      August 15, 2011 at 8:43 am | Reply
    • cusack

      Jeff, you're seriously overestimating the moral standards of american policy-making and way of life for that matter. It's a country that worships golf players and characters of stupid tv shows. All the majority of population really cares about is money. And so naturally they'd go in bed with anybody who offers them an extra pair of cheap jeans. It's happens to be China these days.

      August 15, 2011 at 11:19 am | Reply
      • USA

        There are more true Christians in China then there are in our nation.
        http://www.thepropheticyears.com/wordpress/214.html

        August 15, 2011 at 1:22 pm |
    • USA

      Jeff, this is the reason why God is blessing China. No one can stop Him. He is in control!

      There are more true Christians in China then there are in our nation.
      http://www.thepropheticyears.com/wordpress/214.html

      August 15, 2011 at 1:25 pm | Reply
  5. bachmanntwit

    FACT: Michele Bachmann's husband, Marcus Bachmann, is as qu**r as a 3 dollar bill. Apparently, "praying away the gay"
    hasn't worked for him.

    August 15, 2011 at 8:58 am | Reply
  6. Anpadh

    This article is not only misleading but inaccurate. Ultimately, it is the US Treasury that makes Social Security payments. If the Treasury has enough money to cover Social Security payments, why did we hear that the government would not be able to send out Social Security payments if the debt ceiling was not raised? Social Security money has been spent already. Social Security payments are nothing but debt. The US is out of cash. Yes, it can print money. But the value of the dollar will then decrease. This WILL happen, no matter what Zakaria or anyone else says.

    August 15, 2011 at 9:00 am | Reply
    • AGuest9

      If there is no budget, the US cannot service its debts. Payments cannot be made. Employees are sent home and those who work in government/VA hospitals and air traffic controllers are basically volunteers at that point. It doesn't matter that there is money in the trust fund, US payments CANNOT be made.

      August 15, 2011 at 9:14 am | Reply
  7. Weather Man

    Sell Taiwan to them for 2.4 trillion.

    August 15, 2011 at 9:02 am | Reply
    • USA

      The tragedy is we did sell them out and we still pay them with discount fighter jets hoping to regain their trust.
      We USA think Chinese are really stupid!

      August 15, 2011 at 1:11 pm | Reply
      • USA

        The tragedy is we did sell them out and we still pay them with discount fighter jets hoping to regain their trust.
        We USA think Taiwanese/Chinese are really stupid!

        August 15, 2011 at 1:12 pm |
  8. AGuest9

    You mean they're not stringing us along like a dealer does to his addicts?

    August 15, 2011 at 9:05 am | Reply
  9. FantasyBaron

    The Chinese have lent out around $10-15 Trillion to state enterprises and private investors to keep their economy humming and right now they're at about 1% bad debt. they predict that bad debt could go as high as 12-14% over the next couple of years. So if 1% of all mortgages were toxic bad debt to start with and crushed our economy; where will China be if they experience double-digit bad debt numbers? There's no such thing as miracles, too good to be true, etc.

    August 15, 2011 at 9:17 am | Reply
  10. Alejandro

    What makes Zakaria think the U.S dollar is always going to be #1. Making all these assumptions China THis or that.
    What happens if China invest in its currency? Which is what they are thinking.

    August 15, 2011 at 9:26 am | Reply
  11. JD

    What gall! You work hard and produce and we consume on the cheap, thus doing you a favor. Furthermore, it is a really sad situation when the national prestige of the US has to be saved by a newbie immigrant with a discernible foreign accent. Things must have indeed gone awry for the once great country.

    August 15, 2011 at 9:32 am | Reply
    • USA

      You got it baby!

      August 15, 2011 at 1:07 pm | Reply
  12. Joe800

    ..when the cops start finding caches of Chinese Yuan or Euro's buried by the drug cartels by the ton, rather than the dollar, then I'll worry. When the world's illicit economy of drugs, guns, girls is operated on the Yuan, I'll worry....china cant feed itself...when it can, I'll worry...

    August 15, 2011 at 9:38 am | Reply
  13. ALEJANDRO

    You can have the biggest military in the world but once a nation goes nuclear; nobody can touch it or we all die.
    So all these talk about who has the biggest dick is dumb.

    August 15, 2011 at 9:38 am | Reply
  14. Joe

    Some folks just won't except the truth. The sky is always falling in the eyes of some folks. This article speeks volumes of truths and you radical right wing nuts just can't except the truth. China is vastly dependant on the United States to sale it's goods. I have always said the decline of America is greatly exagerated. Look at the economies of the world! No one is doing well economically and certainly no major power is doing well. Buying gold and silver is a panic game. Sure the value holds but it does not appreciate much greater than anything else. At best gold and silver hold value better and yes thats a good thing but you most likely won't get wealthy by owning gold rather you were already wealthy when you bought the gold and you want to insure that wealth holds so you buy gold and silver. Good strategy for the wealthy.

    August 15, 2011 at 9:39 am | Reply
  15. Joe

    But back to China. China and the U.S. will for a long time in the future be dependant on each other and their economies will be inermingled for decades to come. Good Day, Joe.

    August 15, 2011 at 9:42 am | Reply
  16. 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 10:04 am | Reply
  17. Andy

    The author is right; China is stuck on a debt-buying cycle in order to keep its economy from tumbling. This point is clear if you factor the following: 1) Chinese population is the largest in the world and while they keep growing, they’ll need to be fed, 2) Chinese expansion to Africa portrays a desperate nation in need of primary resources including oil, gas, coal, and lumber, in order to feed its mass production economy, 3) Any rise of USD vs Yuan would cause a catastrophic decline in Chinese economy and signal the end of our economic crisis as production and investments would return to US soil. Therefore, it is not in China’s best interests to slow down or stop their dollar buying strategy any time soon. As for a war between US and China…only an imbecile would discuss this topic! Cheers from nyc...

    August 15, 2011 at 10:17 am | Reply
    • Jon (not Huntsman :)

      "Any rise of USD vs Yuan would cause a catastrophic decline in Chinese economy"'

      Andy,
      I think you mean any rise of the Yuan vs the USD.

      August 15, 2011 at 1:02 pm | Reply
  18. YigalG

    The Chinese have not done with us yet, there is much more at stake for them before they will allow the US to collapse. The current phase is to move over all the high tech and advanced industries we have to China. Apple is an example of how those technologies are being transferred. Apple employs 50,000 sales people in the US to sell the Iphone but employ 1 million people in China to design and build the Iphone. The “secrete” Iphone technologies, like Iphone 5 is already sold in China as a local clone. They have the technology already. China is not shy about the transfer stage. They announced the largest airplane maker in the world with orders already of 900 planes, dwarfing Boeing and Airbus combined. They will need to buy computers and engines from the West, but they insist that all the technologies will be built in China, so they can copy it freely for their own military use. Sophisticated technologies like imaging machines (MRI, PET, etc.) make by GE are already made in China. Their next step is biotechnology. They just announced that they want 80,000 Chinese scientists in biotechnology who work in the US to come back to work in China and built the most sophisticated laboratories (made in US companies). We trained those foreign born scientists and now they take their trade to China. There are endless of examples of how China becomes very quickly the future of innovations in the world and they are doing it not just because they want to be the only superpower in the world, but also because they know it’s just a matter of time before the US will collapse on its own unable to compete in the world. There are 2 industries that China specifically leaving out for the US and those are agriculture and computer operating system. Agricultural products like machinery, seeds, and fertilizer are very important basic necessity in the world and especially for China. China is the largest importer of rice from the US. So they make sure we continue to grow rice and wheat for them and the world because they do not seem to be able to grow them as much. Microsoft has a dominance in operating system Windows and the Chinese decided not to challenge that product until they are ready to pull the plug and let the US die. However, they are not worried about it especially because Open code windows, a free operating system that mimics Microsoft Windows and Open Office, Microsoft Office, made by thousands of US programmers and secretly financed by China, is available to them as well.
    I don’t know how much longer the US has before our standard of living will collapse and we all will become unemployed but the writing is on the wall. Most prominent universities like Harvard, Stanford, and others have campuses in China and their professors are teaching in China. GM and GE make most of their revenues in China, and most Wall Street financial companies have office in China. The migration to China is in full swing, interestingly, no one is talking about that!!

    August 15, 2011 at 10:32 am | Reply
    • USA

      Again I don't think we can blame the Chinese. Look at us, we abort millions of unborn every years, if babies were born for some reason, we don't give a s-–ht and our kids grow up trash! Today, foreigners fill up our best universities and our home grown kids end up in lock-ups!
      Who can we blame? We are corroding from inside out and that has nothing to do with the Chinese!

      Does anyone really think the world will be better off without Chinese, Indians or Mexicans??

      August 15, 2011 at 12:46 pm | Reply
      • USA

        Why Fareed is CNN #1 show? Is it because Fareed is smarter than most home-growns?

        August 15, 2011 at 12:58 pm |
    • ann

      Agree with you..they are taking advantage of us but its our own fault...people need to start cpmplaining more...I for one, would like to purchase more " made in American" made products...too much is made in China from our own companies.. we control what happens to us by complaining in large numbers...they are buying up our land( I dont think foreigners should be allowed to), they are taking our jobs, they are copying our products , one of they are one of the largest contributors to American colleges in students-will the students stay or go back to China? The government pays their way to learn from us...China knows what they are doing, and we are allowing ourselves to be hurt in the process.I'm just saying, we need to look out for our own FIRST from now on. Immigration should be by invitation only for awhile, choose those we need in job markets, business makers. http://www.thirdworldtraveler.com/Transnational_corps/See_No_Evil_China.html

      August 25, 2011 at 6:31 pm | Reply
  19. Jack

    I see the Chinese propaganda pseuds are out in force again.

    Ooooh, an Aircraft Carrier! *lol*

    China is decades behind the technological curve and their relentless, childish victim mentality is tiresome.

    August 15, 2011 at 10:34 am | Reply
    • ann

      If you worked for a US corporation based there...if you listened to other countries opinions on China and the US, you may change your opinion. This is a BIG deal and people need to wake up and complain... http://youtu.be/0J7kUuQnD9U

      August 25, 2011 at 6:37 pm | Reply
      • ann

        And they are doing it all around the world... I dont know who it benefits more.
        http://youtu.be/BoQvuRKcI6A

        August 25, 2011 at 6:41 pm |
  20. Rick McDaniel

    Tell that to Washington.......and especially to Obama. He is NOT getting the message. Or much of any other message, for that matter.

    This may become the all time worst President, in history.

    August 15, 2011 at 10:42 am | Reply
  21. Silk_Road

    The author is right, both the US and China are stuck in this relationship, with little or no way out. China has started to invest money into natural resources, which can be seen in Africa, Iraq and Afghanistan. In these places China is using its large amounts of money to purchase what resources these poor countries might have, of course this is all funded through state-run enterprises. China has also invested in technology, but most of that is imported and then poorly copied or misused, such as the recent CRH train that crashed in Wenzhou. I certainly hope the domestically build airplane fairs better. I believe the final place that China would like to invest is in the US, and I don't mean with T-bills, but with out right corporate takeovers or land acquisitions...

    August 15, 2011 at 10:56 am | Reply
  22. mikel

    China's motivation is, and always has been, to sabotage the American economic, political, and military system. The US politicians are just too scared (or as Obama supporters say: pragmatic). It's too late to do anything really effective until a government is in power that will make the fearless changes. As long as the masses vote in Obama and his wannabe minions and the republicans consider taxes a crime against humanity, you are in for the worst times.

    August 15, 2011 at 11:07 am | Reply
  23. Dan

    I don't get it! We owe 9x more to our own social security fund, but daily we pay 73+ million towards Chinese loan interest (and even more policing the world). How much is returned to the social security fund each day? Why has our social security fund become a slush fund account for DC politicians to drain on pork barrel spending? Has investing social security dollars yielded a return?? Has selling off social security gained a thing for the future of America? Please tell me... i honestly dont know.
    Lastly, Its only a matter of time before foreign powers do have the training and technology to threaten us physically.. You guys can argue military all you want, but Americans who dont pick up a gun or wear the colors make up the majority of our nation, and in my opinion are the beating heart of our economic engine. Sure military spending is enormous, and spurs innovation, but the military foundation is in response to liberating and protecting our first bumper industry... farming. Would it help if we used our arable land and American citizens; rather than guns, soldiers, and debt packaging to solidify the US economy?

    August 15, 2011 at 11:20 am | Reply
  24. David D.

    If we make our own stuff here, we can stop borrowing from China and employ our people.

    August 15, 2011 at 11:29 am | Reply
    • USA

      So simple yet make so much sense; however, would you able to live on 2 dollars a days and work 8 hrs a day?

      August 15, 2011 at 1:03 pm | Reply
  25. JB

    It's unfair to say who is doing whom a favor, Beijing need the US bonds to fill up reserve, that is true. However, what's the number U.S government consumer from debt? Zakaria probably also need to post that number compared to 833 USD per sec. The both will go banlcrupt at the same time.

    August 15, 2011 at 12:27 pm | Reply
  26. Jon (not Huntsman :)

    It sounds like we are all trapped in a vicious cycle that will lead to the downfall of civilization.

    August 15, 2011 at 12:54 pm | Reply
  27. Xm

    China is a self supplied country for 5000years. Investigate it before u post.
    China Is not Africa, who has food crisis. It produce so much that "Made in China" is everywhere in the world.
    Think about what if china stops the supplies all in one day suddenly. No need military action at all.

    August 15, 2011 at 1:05 pm | Reply
  28. jona

    Why listen to what Zakky boy has to say? He's a confused, angry anti-American liberal import. China doesn't OWE us any favors Zak!

    August 15, 2011 at 1:12 pm | Reply
  29. gaucho420

    China is where it is, trapped, due to its own false assention that is propped up by a currency that is totally undervalued. They play a game, and so does the US, and as a result, both are trapped in this situation.

    XM- If China stops its supply, then it will go broke. Think about that before you post, especially as its "supply" is neither food nor water.

    August 15, 2011 at 1:16 pm | Reply
  30. Chuck

    What the Chinese apparently fail to realize is the prosperity some of their citizens enjoy is due to our trade deficit and an artificially low Yuan. If we were to "live within our means", which I agree with to some extent, then their economy would go in the toilet.. With Europe imploding and the US reaching it's limits, they will be toast within a few years.

    Also, this is coming from a country who mandates spending by corporations. They spend billions on real estate projects and build towns and malls with nobody living or buying there. It's true... there are dozens of reports of completely empty towns being built and nobody living in them because the average Chinese worker can't afford it. The "demand" is artificial and China will eventually fall. They don't even have enough energy to keep their factories running 24 hours. How can they possibly continue a 8% GDP rate? They , as well as globalization, is on it's last leg.

    August 15, 2011 at 1:17 pm | Reply
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