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 (729 Responses)
  1. Soulcatcher

    China is the next bubble. China's worker's are being replaced by robots worldwide.

    The problem is robots will probably be manufactured for less in China by Robots. Well at least until someone manufactures a fully automated facility.

    August 15, 2011 at 1:39 pm | Reply
  2. ZWS

    Author seems to be enjoying the power of US over China in being able to renege on debt payments. He went as far as saying "we are doing china a favor by paying interests". Come on, since when do we enjoy in being a deadbeat?

    August 15, 2011 at 1:42 pm | Reply
  3. Heyryk

    Comunist China depends on Trade, if China don't have enough trade she recede. The trade of china is to sell all its goods of low quality in a low prices requested almost for everybody, but if China fail on trade if the request for that goods slow down the development of China will stop and in this case Comunist China will mount a lot of pressure on USA to take back its money for all means China is not doing a favor is trying to make a profitable buisiness.

    August 15, 2011 at 2:21 pm | Reply
  4. shufflin123

    people argue too much.

    August 15, 2011 at 2:35 pm | Reply
    • bob

      hi

      August 15, 2011 at 2:37 pm | Reply
      • shufflin123

        wats up BOBBB!!!!!!!!

        August 15, 2011 at 2:38 pm |
  5. sk8104s8tan

    and china just invested $3.8 billion in canada's oil and gas industry. the US boycotted the alberta oilsands because of the alleged environmental impact so to save thousands of jobs canada turned to china, had no other choice.

    August 15, 2011 at 2:36 pm | Reply
    • bob

      STOP SAYING BIG WORDS YOU NERDS

      August 15, 2011 at 2:45 pm | Reply
  6. bob

    nuthin shuffliin

    August 15, 2011 at 2:39 pm | Reply
    • shufflin123

      shufflin every day

      August 15, 2011 at 2:41 pm | Reply
  7. bob

    nice

    August 15, 2011 at 2:42 pm | Reply
    • shufflin123

      that cow is funny

      August 15, 2011 at 2:47 pm | Reply
  8. bob

    True dat i want one

    August 15, 2011 at 2:48 pm | Reply
  9. Bruno Silva

    I would like to write something. I read many of the statements above, and to some extents they are true and to some others they are not. But they miss the main point.

    Where are the super Babylonian empire? the Medes and Persians? The Greeks? The Roman empire (they lasted over 1000 years)? The European super powers? England empire? So as they pass, the USA will pass and so will any other power that rises, for there is only one kingdom that remains forever, and it is the KINGDOM OF GOD.

    I didn't see the heavens shake in the financial crisis, or the stars fall down from heaven because of the 2 world wars. While mankind is always trying to beat to their chest and state who is the best, he controls the universe with HIS HAND ALONE. Not counting the countless angelical hosts of angels in heavenly armies which outnumber over and over the mankinds whole population over and over. They dominate the spiritual relms, and they dominate the kingdom OF DEATH AND HELL (satans) UNDER THEIR FEET THROUGH GOD. Whatever happens here on earth is merely a permition of God.

    There is hope for America. There is hope for China. There is hope for the world. This world as a whole will crumble one day, but as said the Lord Jesus, Savior and Christ:

    1 “Do not let your hearts be troubled. You believe in God[a]; believe also in me. 2 My Father’s house has many rooms; if that were not so, would I have told you that I am going there to prepare a place for you? 3 And if I go and prepare a place for you, I will come back and take you to be with me that you also may be where I am. 4 You know the way to the place where I am going.” 5 Thomas said to him, “Lord, we don’t know where you are going, so how can we know the way?”

    6 Jesus answered, “I am the way and the truth and the life. No one comes to the Father except through me. 7 If you really know me, you will know[b] my Father as well. From now on, you do know him and have seen him.”

    http://www.biblegateway.com/passage/?search=John%2014&version=NIV

    34 Then he called the crowd to him along with his disciples and said: “Whoever wants to be my disciple must deny themselves and take up their cross and follow me. 35 For whoever wants to save their life[b] will lose it, but whoever loses their life for me and for the gospel will save it. 36 What good is it for someone to gain the whole world, yet forfeit their soul? 37 Or what can anyone give in exchange for their soul? 38 If anyone is ashamed of me and my words in this adulterous and sinful generation, the Son of Man will be ashamed of them when he comes in his Father’s glory with the holy angels.”

    http://www.biblegateway.com/passage/?search=mark%208%20&version=NIV

    7 John said to the crowds coming out to be baptized by him, “You brood of vipers! Who warned you to flee from the coming wrath? 8 Produce fruit in keeping with repentance. And do not begin to say to yourselves, ‘We have Abraham as our father.’ For I tell you that out of these stones God can raise up children for Abraham. 9 The ax is already at the root of the trees, and every tree that does not produce good fruit will be cut down and thrown into the fire.”

    http://www.biblegateway.com/passage/?search=luke%203&version=NIV

    5 Moses writes this about the righteousness that is by the law: “The person who does these things will live by them.”[a] 6 But the righteousness that is by faith says: “Do not say in your heart, ‘Who will ascend into heaven?’”[b] (that is, to bring Christ down) 7 “or ‘Who will descend into the deep?’”[c] (that is, to bring Christ up from the dead). 8 But what does it say? “The word is near you; it is in your mouth and in your heart,”[d] that is, the message concerning faith that we proclaim: 9 If you declare with your mouth, “Jesus is Lord,” and believe in your heart that God raised him from the dead, you will be saved. 10 For it is with your heart that you believe and are justified, and it is with your mouth that you profess your faith and are saved. 11 As Scripture says, “Anyone who believes in him will never be put to shame.”[e] 12 For there is no difference between Jew and Gentile—the same Lord is Lord of all and richly blesses all who call on him, 13 for, “Everyone who calls on the name of the Lord will be saved.”[f]

    http://www.biblegateway.com/passage/?search=romans%2010&version=NIV

    16 For God so loved the world that he gave his one and only Son, that whoever believes in him shall not perish but have eternal life. 17 For God did not send his Son into the world to condemn the world, but to save the world through him. 18 Whoever believes in him is not condemned, but whoever does not believe stands condemned already because they have not believed in the name of God’s one and only Son. 19 This is the verdict: Light has come into the world, but people loved darkness instead of light because their deeds were evil. 20 Everyone who does evil hates the light, and will not come into the light for fear that their deeds will be exposed. 21 But whoever lives by the truth comes into the light, so that it may be seen plainly that what they have done has been done in the sight of God.

    http://www.biblegateway.com/passage/?search=john%203%20&version=NIV

    August 15, 2011 at 3:50 pm | Reply
    • USA

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

      This is the reason why God is blessing China today. No one can stop Him. He is in control!
      When we humble to the Almighty God, our eyes will open. We were once blind but now we can see!

      August 15, 2011 at 9:15 pm | Reply
  10. oldbear60

    Most of you are missing the salient feature of this ongoing debate about us and china. The chinese do EVERYTHING based on what is good for China. This is the only real function of ANY government, something the US has long forgotten. China will posture, bellow etc., but watch carefully every move is orcherstrated to the Chinese advantage. The only think that counts for them, under ANY political system, is what is good for the "middle Kingdom" and it's Chinese citizens. Wake up or learn to kowtow and speak mandrin.

    August 15, 2011 at 3:57 pm | Reply
    • Rahull

      The Chinese have good leaders and US leaders have good lip services.
      The Chinese leaders really care for their people; US need to shut the h up about Chinese dictators killing their own people baloney!

      August 15, 2011 at 9:04 pm | Reply
      • jack

        You're right that we have lip service and not leaders. Our politicians are just greedy and power hungary. Our people vote for people with chrisma instead of talent and knowhow. Obama was the biggest mistake behind the re-election of the big dummy Bush. We have to blame ourselves for voting these losers in.

        August 16, 2011 at 10:53 am |
      • USA

        @ jack
        You're right that we have lip service and not leaders.
        -------------------------------------
        Something is very wrong with our voting system. Our leaders are actually very intelligent people but somehow they are either making senseless decision (Bush) or become paralyzed (Obama) once they got elected.

        August 16, 2011 at 3:40 pm |
  11. Rahul

    if I were Obama, I could have said US citizens to increase population and I think this is the only permanent solution of US economy for long as well as short term. Increase in population will increase talent, increase market, increase cheap labor, increase human resources and will increase everything. At least US should double its population which can be accommodated in mid and central US. See the chinese, they are most populated and that's one of the reasons of their robust economy.

    August 15, 2011 at 4:33 pm | Reply
    • Rahull

      if I were Obama, I could force US citizens stop be the friends of their children but be a good parent as it should be.

      August 15, 2011 at 8:59 pm | Reply
  12. R.D.

    China has no historic reason to be the US's enemy. In fact during WW2 they were allies. Prior to that 1850's the US gave up it's interest in the opium trade and left peacefully. If anything China is a wartime ally of the US and now an economic ally as well. War would only make money matters worse and achieve nothing. The wild card is that nutty North Korea and maybe Pakistan after that issue hiding Bin Laden. Both of who are nuclear powers.

    August 15, 2011 at 5:21 pm | Reply
  13. sk8104s8tan

    when china becomes free and democratic they will become more powerful than USA in no time at all. just imagine 1.3 billion chinese being allowed to go wherever they want, own whatever they want, have as many children as they want, they will overrun the world.

    August 15, 2011 at 6:05 pm | Reply
    • Oh no

      I love this, either way we are screw!

      August 15, 2011 at 8:52 pm | Reply
  14. duh

    The Chinese need us more than we need them, who else is going to buy all there cheap crap. They need to sell their inferior and cheap merchandise to provide meager wages to their up and coming middle class. To do this they will continue buying our debt. We can always print more money. This financial global market is one giagantic merry go round, you can never get off the players only change.

    August 15, 2011 at 6:15 pm | Reply
    • Chinamun

      "The Chinese need us more than we need them, who else is going to buy all there cheap crap" I love this, yooo Amarican lub cheap crap?

      August 15, 2011 at 8:48 pm | Reply
    • Chinamun

      "who else is going to buy all there cheap crap"

      Yooo Amarican lub cheap crap?

      August 15, 2011 at 8:49 pm | Reply
  15. Chettahe

    The Chinese and our country have a trade relationship that is completely lopsided. We import quite few hundred billion a year more goods than they buy from us. This is due to a lot of factors like cost, China has a protectionist trade policy and they require local content on major item purchases and a cheap currency.
    The problem here are not the Chinese, but the US policy makers whoever they are, who they do not give a hoot about preserving US jobs on every trade agreement that they sign.
    Until we get a leadership which cares about the citizens of this country we will be traveling down the road to ultimate financial ruin.

    August 15, 2011 at 7:16 pm | Reply
  16. mat o'brian

    Fart Z. is a real sherlock ... maybe when everyone pays 80% taxes like this genius would love to see ... then he comes up with other brain farts ... like socialism is dead on arrival ...

    August 15, 2011 at 11:35 pm | Reply
  17. Helen

    It is not a comment, but I do curious what your recommended alternative is?

    August 16, 2011 at 2:11 am | Reply
  18. Tim

    Ha, all your comment is self-centered, no matter USA is becoming the enemy of whole world. We are waiting the day whole world units together to beat USA.

    August 16, 2011 at 2:34 am | Reply
  19. Che-3

    Unlike USA, China have leaders with REAL BRAINS. China doesn't go about creating FAKE & Bogus wars so that senators with war monger mob mentality and their merchants of war profiteers companies in their state could benefit.

    August 16, 2011 at 9:10 am | Reply
  20. Latweef Shen Myint-Thu

    U.S.A.'s economy has grown based on the level of debts that U.S.A. has, that is, the more debt US has the more US economy grows – which is the system since World War II. In this debt and growth circle, U.S.A. may have been too far into it to be back on tracks when Obama's proposal of cutting 4 trillion in deficit and raising the taxes on the wealthy people or even stopping Bush's era tax break for the wealthy people and companies...

    For China, it has grown good and great with many consumers as well as not so many producers. But, China must take on keep going by looking forward "How far it still needs to go," rather, "How far they have come."

    U.S.A.'s mistakes: Wars are economic growths for U.S.A in the past... But, this time, too much into debt circle and putting more interests on getting the oil than real good intentions... made U.S.A to be bad on the world stage, and economic status...

    My 2 cents note...

    August 16, 2011 at 9:38 am | Reply
  21. Bob C.

    Don't worry, the U.S. is too big to fail. We'll get bailed out.

    August 16, 2011 at 10:27 am | Reply
  22. Zan 07

    Education, education, education. Please invest in American education now and we won't have to fear anybody.

    August 16, 2011 at 10:40 am | Reply
  23. jack

    We need to get our economy going and not borrow from those short sighted short people. The first thing we need to do is get rid of Obama in 2012. He's lead us into deeper debt instead of the other direction. We need to buy Ameerican or anything but buy Chinese. all we're doing is financing a country that wants our downfall. they just can't wait to see it happen. If we keep Obama in office another four years they just may see it.

    August 16, 2011 at 10:48 am | Reply
  24. J

    I used to believe CNN was a credible, unbiased, news worthy and worth reading media outlet. Nowadays it seems that a plague has run rampant in CNN hq. Idiocy. If I was the chief editor that let this idiot compose this article, I would have killed myself in order to avoid shame, same goes for Fareed. You (Fareed) say that we are doing China a favor while others are saying China is doing the US Gov. a favor. Here is a question, have you ever thought that this is a for PROFIT business and not a charity? If any side is doing a favor for anybody, there wouldn't be profits or at least record breaking profits. If what you say is true, then our corporations wouldn't be making these record profits by cutting expenses and exporting our jobs elsewhere. We aren't doing any favors, we are just trying to either exploit others and profit or cut our expenses and profit. Nonetheless, corporate America is not doing anybody any favors. Not the Chinese and most definitely not the American people. If they were, they wouldn't outsource our jobs and leave even more work for the people that are left behind to suffer. Also your (Fareed) comment about the Chinese "blasting" or criticizing the US Gov while buying bonds sounds childish. So what you're saying is that if the Chinese Gov. and media bashes the US Gov. for being stupid, are they not allowed to buy US Treasuries? And if that, if I bash the US Gov. for being retarded at handling our nations problems, am I not allowed to buy US goods or be an American citizen? Whatever happened to free speech and will? Or is that dead like chivalry? The other question is, does the Chinese media bashing the US Gov. really bother you that much? Are you insulted? Because I can whole-heartily say that many Americans think the US Gov is retarded for letting idiots run the show and screwing over the good, hardworking TAXPAYERS fueling this country. While you (Fareed) have presented some facts (which have no sources and no credibility but I will give you the benefit of the doubt nonetheless) you have ruined your article with horrible speculation and child like responses to those "facts." Please next time, take into consideration of presenting ONLY facts and no opinions as it further deteriorates CNN's reputation and makes me lose faith in humanity.

    August 16, 2011 at 11:18 am | Reply
    • USA

      I am with you. I have much respect for Fareed until I came across this article. Success has overtake him. This time he is crossing the line of no return.

      However, I will be sad to see him go.

      August 16, 2011 at 3:21 pm | Reply
  25. Richard

    Keep convincing yourself that China is stuck in a viscious cycle. If it ever wants to break the cycle, it will simply buy up the rest if the land that it doesnt ready own and foreclose on the USA. Wouldn't even need to go to war, just buy the USA. The ultimate irony in the capitalistic great American dream.

    August 16, 2011 at 8:06 pm | Reply
  26. pedro

    China, just shut. Build a Greater Wall around you to box yourself in. Manufacture for your people. Dont export. Feed your people. Live off on your own, exist on your own. No one wants to go your country. No one wants the people coming out of your country. The rest of the world and you, can exist separately.

    August 17, 2011 at 12:44 am | Reply
    • That'snotTrue:[

      You can box yourself in your mom's basement or where ever you're typing this while the rest of the civilized world including China moves on without you.
      Really short sighted and narrow perspective are not needed in an advancing world.

      August 17, 2011 at 12:15 pm | Reply
      • pedro

        you a chinaman?

        August 17, 2011 at 9:54 pm |
    • craig

      Whether this fellow is a "Chinaman" or not, he seems to at least be able to write English properly in contrast to your kindergarten level writing. And p.s., it's not cool to be racist.

      As far as what you say about China, if you've ever studied history (I doubt it) you will see that China was insulated and trading within its borders for over a thousand years, only releasing some goods along the Silk Road. It was to find a better route to China that America was discovered. Then during the Opium War, the British, Americans, and various other European countries invaded China and forced it to trade with the outside world against its will, forcibly addicting the Chinese population to opium to trade for their gold as well as pillaging the country. Unlike your ancestors (if you, Pedro, are indeed Hispanic), the Europeans were unsuccessful in wiping the country off the map, and China has regrown and is now lending money to us rather than using it to build missiles to point in our direction. I fail to see where your animosity comes from unless of course it is purely hatred due to racism.

      August 18, 2011 at 3:35 pm | Reply
  27. craig

    China obviously wants to see the US economy recovering and growing and consequently buying more Chinese goods. Instead, they US economy is shrinking and now it's too late for them to back out, like being in a marriage with an alcoholic but not being able to get a divorce because of the kids. Hopefully we'll get some treatment from AA and thank China for being there for us... Or alternatively we can say you didn't do it for me, you did it for the children... grateful or not, the solution is not whether or not China needs to lend us money, but how we get our own ship back in shape.

    August 18, 2011 at 3:24 pm | Reply
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