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. Annexian

    The difference is that they are still a Communist country with an authoritarian government and in case of an emergency can and will take any and all means to control things. It's more than Tienamen, they can tell their business elite, "We do thing this way now..." with no question to obedience. By contrast if the USA does free-fall into a true depression, our "Rich Elite" will fight like a stray animal captured by an "Exceptional" person facing it's 20th daily "Temperature reading" on any and all socially progressive measures, by knee-jerk, even if it benefits them in the long run and costs little or nothing in the short-term.

    Frankly, China's doing everything it should. The outsourcing that cheats the American his wages? All that technology, from the computers to manufacturing is then copied, worked on, re-used.

    Marx should have been a Chinaman ala non-pc "Yellow Peril" stereotypes

    "Flom each akkolding tu he abirity, tu each akkording tu he need!"
    "Da last kapitarist sharr sherr us da lope with which we sharr hang him!"

    August 14, 2011 at 4:45 pm | Reply
  2. HIH

    A evil marriage what fun..

    August 14, 2011 at 4:51 pm | Reply
  3. Michael

    The Chinese citizens could always buy their own goods which they produce instead of exporting it to America. Seeing as there are over a billion of them. As the Yuan appreciates in value when the Chinese stop subsidising the US government, the Chinese will be able to enjoy the fruits of their labour even more so since they Yuan would be able to buy more goods for less Yuan.

    August 14, 2011 at 4:54 pm | Reply
  4. Jim

    American companies, with their greed filled obsession for cheap, exploitable labor along with America's unwillingness to pay for what they buy, ex. (too much unsecured consumer type credit for individuals and taxes too low that they don't pay for the country's needs) has give China all the tools necessary to dominate the United States and relegate it to being a second rate country full of violence and poverty. They can do this without firing a shot.

    August 14, 2011 at 4:54 pm | Reply
  5. Polymath

    It is going to happen anyway – the economy in China is faltering just like it is everywhere else. When they can no longer support the drag of the US, they will cut us loose – they will have to or their economy will crash and burn just like ours. They are just playing a game of "chicken" with the other debt holders and I'll bet they win by divesting first. In the end, there is too much debt to crawl out from under and everyone involved will eventually lose – the US taxpaying citizen most of all.

    August 14, 2011 at 4:54 pm | Reply
  6. AndrewCarlton

    Why is this clown (Zakaria) harping on China AGAIN? He must be Indian I guess. WOW, look at that! I guessed correctly. Pretty sad that CNN allows an Indian-American to report on China their Arch Nemesis.

    August 14, 2011 at 4:55 pm | Reply
  7. Justice

    You can thank Mr. Rothschild and the family for getting us in this bloody mess. 150 Years later, justice still hasn't been served.

    August 14, 2011 at 4:57 pm | Reply
  8. G. R.R.

    Which is all the more reason why America needs to stop borrowing. If we did, we would get back much of our manufacturing. This is a lethal combination for America.

    August 14, 2011 at 4:57 pm | Reply
    • Paul

      Do you ever think rationally? This is the chicken and the egg argument. How does China get $1 trillion to lend to us?

      And why does a country that has it's own currency need to borrow it's own currency? Maybe, "borrowing" is not really what it seems.

      August 15, 2011 at 4:58 am | Reply
  9. william

    Have you EVER posted a pro USA article? Where did you grow up? What qualifes you to post these opinions of the USA? Iam not being sarcastic, but where did you come from and what are you qualifications? You phote appears that you are at most 35. This give you the judgement and wisdom to comment on such heavy subject and be believable?

    August 14, 2011 at 4:58 pm | Reply
    • Polymath

      I have been complaining to CNN for months to no avail ... he must have some dirt on CNN or his dad owns the network ... obviously something like that as he is not the sharpest tool in the shed.

      August 14, 2011 at 5:03 pm | Reply
    • hmbsandman

      Did you just see his face and read his name and automatically figure he was anti-US?

      Or did you read the article? Can you even read? Which portion of it was anti-US?

      August 14, 2011 at 7:50 pm | Reply
  10. Ell

    Unfortunately you are about a year late in reporting on this story. Glenn Beck has warned about the economic crisis here, an in Europe. He also explained about our global economic Assured Mutual Destruction, even though you only focused on China. Either you ripped off the story or you are way behind on the issues. My thought is it is the latter. Way to go, ....

    August 14, 2011 at 4:59 pm | Reply
  11. Brandon L

    Zak, & other commentators here are placing to much faith that a rising yuan would weaken China. The Chinese will change the Global Monetary System as we know either through SDR, Bancor, or simply Gold & Silver metals.

    In fact the faster the yuan increases great. China will undergo a period of economic growth with Chinese citezens purchasing Chinese goods & services that are not going to be exported with a rapidly rising Yuan but consumed domesticly by savings that appreciate. Americans after WW2 had the highest wages, strong domestic consumption, strong exports, a currency that was strong secondly it was redeemable in gold & silver to other central banks; which are net buyers of monetary metals today.

    The US dollar falling gradually or by way of free fall is a positive for the Chinese citezens, et government. Not a negative, there would be no massive increase in unemployment. Exporters would shift to selling consumer goods to the richest middle class due to a rising yuan this world has ever seen.

    August 14, 2011 at 5:00 pm | Reply
  12. Keegan

    "The billions of dollars China has invested in the flagging American economy will become worthless. They will have to negotiate the exchange rate to the new amero. This will then force the creation of the North American Union."

    August 14, 2011 at 5:12 pm | Reply
  13. A

    Well, actually the European Union is now China's largest trading partner... not the US.
    China could keep growing quickly even without the United States since it has much more important trade agreements with Russia and almost every growing country in South-East Asia

    August 14, 2011 at 5:17 pm | Reply
  14. DJ

    Who is this Fareed Zakaria guy and why does CNN give him so much status? I never heard of him before, but every Sunday he's there to "comment" or more like criticize America.

    August 14, 2011 at 5:17 pm | Reply
    • Ryan

      crumbling empires give anchors lots to talk about.

      August 14, 2011 at 5:37 pm | Reply
      • J3sus Sandals

        Is he an anchor or a buoy?

        August 14, 2011 at 6:22 pm |
  15. Mike

    If anyone would listen to Glenn Beck he explained this in much more detail years ago. Oh right Beck is crazy but Fareed Zakaria is sooooo next Zakaria will be telling you to buy physical gold and silver like he just figured out that the dollar is getting inflated to trash.

    August 14, 2011 at 5:18 pm | Reply
    • Ryan

      glen beck is an actor and or crazy.

      August 14, 2011 at 5:36 pm | Reply
      • Mike Glenn Beck is an actor, but when the great Fareed Zakaria says the same thing, dumbed down, 18 months late he's brilliant... do you not see how biased you are?

        August 14, 2011 at 6:11 pm |
      • J3sus Sandals

        He's braised not biased.

        August 14, 2011 at 6:23 pm |
  16. michiganmoon

    The sad fact is that everyone is living in a fantasy land about the problem. In example, the surplus in the 1990s was imaginary – we added to the national debt every single year since 1957. The "surplus" came from borrowing $ from about a dozen different government funds including social security.

    We borrow around 46 cents out of dollar that the federal government spends and the recent debt deal will still allow the national debt to nearly double in 10 years.

    August 14, 2011 at 5:21 pm | Reply
  17. vortex100

    If you owe the bank $10,000, the bank owns you. If you owe the bank $1,000,000, you own the bank. It is all a matter of scale. Zakaria is absolutely right. China not only needs us, their entire financial survival now depends on us.

    August 14, 2011 at 5:22 pm | Reply
  18. unowhoitsme

    China need US? China OWNS the US!

    August 14, 2011 at 5:23 pm | Reply
  19. USD

    The only reason hold so much USD is it needs it for foreign reserve. China has to pay imports for oil,food, copper or imports from other countries including US and ***pays USD to US companies***. Whereas americans pay China imports with USD. No need for US to hold yuan as currency reserve.

    August 14, 2011 at 5:27 pm | Reply
  20. freedom

    We cant just buy everything we use with money we don't have. We need to bring back the manufacturing and show the world why we are called Americans. Zakaria alone can't come up with the solution for the the mess we are all in. Lets not forget we help created it too.

    August 14, 2011 at 5:28 pm | Reply
    • Ryan

      you are called Americans because you cant be called united statesins

      August 14, 2011 at 5:31 pm | Reply
    • J3sus Sandals

      "We cant just buy everything we use with money we don't have."

      Yeah we can...and we will...continue to do so.

      August 14, 2011 at 6:26 pm | Reply
  21. Ryan

    china already won. they are the new king,

    August 14, 2011 at 5:28 pm | Reply
    • J3sus Sandals

      All hail General Tso! Yeah, that's right, they've given us heart disease in the process too – bad, cheap, American-ized Chinese food subsidized with MSG.

      August 14, 2011 at 6:29 pm | Reply
  22. USD

    China has to pay oil and food imports in USD

    August 14, 2011 at 5:29 pm | Reply
  23. Tom

    China owns only $1 trillion out of $14 trillion of US debts. The US government owns most of the rest.

    August 14, 2011 at 5:29 pm | Reply
    • Ryan

      when did you fall on your head?

      August 14, 2011 at 5:33 pm | Reply
  24. ObamaBush

    It's sad but true that the U.S. government is too clever while its citizens are clueless. Its nice to know that someone intelligent in the media finally reiterated what I've always known but wasn't the most fashionable way of thinking considering China's is the current fad.

    August 14, 2011 at 5:29 pm | Reply
  25. Terry

    Zakaria may be correct in the short term, but his analysis is exactly that – short. The rest of the world will be more than capable of taking over for the American consumer. China does not need to worry about who is going to buy all their goods long term. Chinese themselves, emerging markets will more than compensate.

    USA is in a horrendous situation. China and the rest of the world are desperate to get out of the dollar. Things are happening now which are laying the framework for the end of the USD reserve status. Countries are trading in their own currencies, IMF has been quite open about ideas for replacement of the USD, even China is taking steps right now to make the Yuan a global player – you can open a Yuan-denominated bank account in NY and LA now. You have to start somewhere, here it is. USD reign will not last.

    August 14, 2011 at 5:31 pm | Reply
    • Ryan

      it is over

      August 14, 2011 at 5:32 pm | Reply
  26. ObamaBush

    Europe is 1/3, US is 1/3rd. Take away 1/3 of your income and see how things go.

    August 14, 2011 at 5:31 pm | Reply
  27. vijay

    peoples, who has a house made of the glass, do not throw stone to others house !
    please tell the leaders and media to go collage to learn about world economics please

    August 14, 2011 at 5:32 pm | Reply
  28. :Time:

    they couldn't infiltrate like they did Us, they were to smart. They now have a Big army and a Master plan. the Give us hints, only the Ones that know what to look for can see Them and They're everywhere. be Prepared and keep Secret but Spread the Truth, their EyeS see everything. LWO

    August 14, 2011 at 5:33 pm | Reply
  29. Lost Generation

    What happens if China shut down GDP export and import in America?

    America will declare greater depression. It's hard to get material and goods from china. America have lack of natural resource in order to stabilized the economy. School, post office, business, other small businesses will not stay open.

    August 14, 2011 at 5:35 pm | Reply
  30. ObamaBush

    Where does China's citizens get all of their purchasing power from? Jobs dependent on lazy American buying cheap garbage.
    Do you really think the BRICs will keep China's economy afloat? they all follow the same "export cheap" road to prosperity. Africa perhaps? Dream on. The Chinese century has turned out to be the Chinese decade, they should get used to doing what Washington tells them. War is also the quickets way if China's gov't decides to commit suicide.

    August 14, 2011 at 5:36 pm | Reply
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