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. Roland

    What I wonder about is who Americans will blame if suddenly all there wealth is wiped out due to hyperinflation.Already there is a huge underclass of angry,disenfranchised, unemployed people.There is little if any confidence in the political system.Already you see politicians emerging that blame everything and anyone. I'm poor because of liberals because of gays or because of foreigners, I'm a good Christian did everything right in my life but now I'm eating dog food.History teaches us that nothing good comes from being in such a position.It can have absolutely disastrous consequences.Weimar Germany is probably the closest comparison and we all know what happened with them.What the world needs is for America to get it's act together and start working again.China should help the US instead of encouraging the self destructive behavior.

    August 14, 2011 at 5:36 pm | Reply
    • USA

      "China should help the US instead of encouraging the self destructive behavior."
      How I wish we have "Chinese leaders" who have the market wisdom and continue buying the T bills disregard public disproval.

      August 14, 2011 at 6:23 pm | Reply
  2. usasucks

    "Why China can't stop lending $$ to America"??? Why can't America stop borrowing from China? America's greed and financial mismanagement is not China's responsibility..

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

      America's greed? Excuse me, but who are letting their workers be paid slave wages? Who give their workers no benefits?

      Newsflash: It's not the United States.

      You are also forgetting that China has been widely rapped in the news and elsewhere for undervaluing their labor, keeping their currency value artificially low, etc.

      August 14, 2011 at 6:01 pm | Reply
      • J3sus Sandals

        It's called strategy...have you not read the Art of War?

        August 14, 2011 at 6:33 pm |
      • isolate

        You're still thinking of China as it was 30 years ago. Read a book about modern china and those stereotypes will vanish. China will pass America in 2016 to become the world's largest economy. You don't accomplish that with slave labor. China is moving into the middle class with a vengeance, and in a few years its citizens will be buying more consumer goods than the US and the EU combined.

        Did you honestly think America was going to stay in first place forever? If so, here's something to meditate on: one hundred years ago Great Britain was the world's greatest power, the richest country, the pound sterling was the global reserve currency, and Britain had an empire upon which the sun never set. Now look at Great Britain today. That's America's fate unless we accept that we've had our time in the sun and treat China the way GB accepted America's domination after WW I.

        August 14, 2011 at 10:51 pm |
  3. TC

    Zakaria has a very compelling argument, but one scenario he did not consider is one in which China weens themselves off of their dependence on exports. China has a huge population– one which can vastly overshadow US demand for Chinese products. If consumer culture in China were to develop to the same degree as in the US, exports would become only a small portion of Chinese GDP. GDP would be driven by internal demand. At that point, China could allow their currency to float and it would appreciate astronomically. Inflation would occur in the US as products become more expensive and the US would become relatively poor in comparison. For companies manufacturing in China, they may begin to consider manufacturing elsewhere as costs rise. However, this would not necessarily hurt the Chinese economy at this point since much of their demand is now supplied internally.

    August 14, 2011 at 5:44 pm | Reply
    • hmbsandman

      China is already working on developing their consumer market. BTW if you've been to Beijing or Shanghai recently you'll see more Bentleys on the road than anywhere else on the planet. If you've checked the stats GM sells more cars in China now than in US.

      This is not necessarily a bad thing. Its isn't just US corporations, but individual Americans can prosper as well.

      The key is to get rid of our debt overhang and get back on track, and do it quickly. Everyone likes to criticize our banks (and rightly so, 2008 was the result of almost unimaginable greed and stupidity) but China does not have a very good banking system. They don't have a good research system either: no country on the planet has a network of Universities that do basic research like US does.

      August 14, 2011 at 8:11 pm | Reply
  4. Remford

    More Zakaria blather

    August 14, 2011 at 5:45 pm | Reply
  5. freedom

    Good point "USD", US can leverage on the security of the US dollars which is widely accepted as the secured currency in the world including the Emerging markets are all hungry for us products. US need to get involved more in Emerging market.

    August 14, 2011 at 5:48 pm | Reply
    • Christopher

      Ah, but the Catch-22 there is that we are not able to do that because American items are more expensive than Chinese/Indian/etc. made stuff while NOT being of much higher quality. I'm not kidding with that either... I compared two items made of the same stuff, made using the same processes, etc.: one made in the United States, one made in China.

      BOTH were of equal quality or so close that I couldn't tell the difference.

      August 14, 2011 at 6:08 pm | Reply
  6. sigh

    China charges 25% import tariffs on American goods while the US tariffs on China are scant. They buy our treasuries to make sure that their currency stays low – treasuries that increase in value for them, at least considering how relatively flat they keep the yuan, as the US dollar inflates (like it has been doing to an insane degree for 3 years now). Trust me, China is not as worried as you might think about our economic troubles. The Chinese gov't has not stopped and will not stop buying treasuries unless we show signs of actually defaulting – it's just too profitable for them.

    An aside – now is definitely not the time to buy gold. Its value has almost gone up 10x since the beginning of the 2000s and even if it does go up a bit for a few years I can guarantee that it will never go up that degree again. There is no such thing as an infinitely rising commodity – remember the housing bubble? If anything I would be selling if you've had it for more than 5 years and stick it in a savings account. Why do people constantly think that it's a good idea to buy high and sell low? Most people should be able to realize that the common opinion makes no logical sense, at least if you're in the business of making money.

    August 14, 2011 at 5:57 pm | Reply
  7. USA

    When comparing the youths from the 2 nations, I doubt that we will end up the winner.

    August 14, 2011 at 5:57 pm | Reply
  8. David Prosser

    Dear Mr. Zakaria,

    You say “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.”

    You also claim, near the end of your article, “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.” But doesn’t your statement tie back into the pettiness of: “If you destroy me, I will destroy you.”

    I understand your frustration, and I as an American am prone to this frustration as well, but today the world is locked into an integral system through globalization. So the idea that “We’re probably doing them a favor” seems to me to be shortsighted. After all, we our responsible for buying, by far, the most Chinese goods but doesn’t this then mean that we are both doing each other a favor?

    More importantly the U.S. and China are just players in one big system, for them to put all the blame on each other for economic woes is akin to a person stating that inner city schools, in the U.S. for instance, are chiefly responsible for low test scores throughout the country. In both instances a vast amount of information is left on the shelf in order to simplify the problem. But how can the problem be understood, and solved, if a large portion of data is not accounted for?

    Martin Wolf, chief economics commentator at the Financial Times, says “Consider then a world in which the US was not one of the world’s countries, but a global federation with equal voting rights for all. Far greater resources would then flow to the poorer regions of this imaginary “world-country,” to finance infrastructure, education, health and the machinery of law and order. …While everybody should be better off if countries combined to provide global public goods, it is normally in the interests of individual countries to let others bear the cost.”

    Mr. Wolf seems to be saying what many economists around the world are coming to, that business as usual will not alleviate the economic crises of today. The world is too interconnected for the U.S. or China to calculate just how they will alleviate their own problems. If they do, the system becomes more imbalanced by their failure or unwillingness to consider how their actions will affect the global economic system.

    August 14, 2011 at 5:59 pm | Reply
  9. Vijay

    What if China buys assets elsewhere instead of treasury bonds of some country. They are already buiying oil companies, Oil fields in Africa, and ports in Europe and Asia. They can intensify buying strategic assets with their trade surplus dollars, and reduce on T-bonds. The reasoning that China has nowhere else to go than T-Bonds may probably be a myth believed by too many powerful people.

    August 14, 2011 at 6:01 pm | Reply
  10. vjpgh

    I would rather pay more for an item, keep it longer and have it made in the U.S. We are missing a huge section of middle class income by not making more items that we use every day. Those manufacturing jobs enabled many people to learn a skill, better themselves and move up in income...not to mention all of the industries that support the manufacturers with raw materials / office supplies, etc etc. I resent the fact that most of the items that we use every day were manufactured in China – and shipped here burning oil on a huge polluting tanker. Seems that we gave away our middle class to help make the Chinese move into middle class. I realize that the trade issue is not simple, but we need to take care of our country first.

    August 14, 2011 at 6:08 pm | Reply
    • J3sus Sandals

      If you "keep it longer," you're not much of a market are you?

      August 14, 2011 at 6:34 pm | Reply
  11. freedom

    Good point "Ben" The question now is, how can we balance the budget ? Zakaria said put everything on the table and l agreed with him.
    Lets not get emotional about the budget cut. everything to the table.
    "
    Zakaria is correct that China is really backed into a corner by running consistent trade surpluses. That surplus causes their currency to appreciate, and the Chinese have to flood the market with Yuan (i.e. trade them for other currencies) to counteract this force. Unfortunately, no market other than US debt is deep enough for the volume of purchasing China must conduct. We really do have them in a tight spot, and it would be even tighter if we could resolve our budgetary issues and stop lending to them. What would they do then?
    "

    August 14, 2011 at 6:08 pm | Reply
  12. George Karpouzis

    Mr. Zakaria I would like to point out several inaccurate statements in your article.

    First, the EU is the biggest Chinese export market, not the US.
    Secondly, China has shifted its focus from export driven to domestic consumption and investment. Although they are big exporters the Chinese are using their foreign reserves to build cities, trains, airports and a military.
    Lastly, you mention all these fiat currencies as alternative investments but fail to mention gold which is rapidly becoming the world reserve currency again. The total value of the worlds gold is close to 3 trillion. As the dollar and euro fall against real assets savers will turn to gold as a store of wealth. In fact it is already happening with gold touching $1800 this week.

    China and America are still very much intertwined, but you would be surprised how well China can muster without 20 billion per month exports to the US.

    August 14, 2011 at 6:08 pm | Reply
  13. andrew

    Its not China. they are already feeling the backlash from the economic woes of this country. They have too much to loose if they try to destroy us. And you know it.

    The trouble makers are countries such as Fareed Zakarias home of origin.

    August 14, 2011 at 6:11 pm | Reply
  14. Steve

    There has been a economic "game" going on for a little over a decade. And that is China intentionally buys our dollars (becomes our bank and lends money to the USA) to artificially keep their currency value down. This is NOT playing buy the economic rule book. Due to supply and demand the prices of goods, labor and the value of money is suppose to go up and down. But when China buys the USA's dollars...they are artificially keeping their currency undervalued.

    This is why their products have been able to remain so cheap...for so long. It is not just their low labor rates, lack of overhead costs (such as pensions/social security, healthcare for citizens, lack of environmental rules). The game of keeping their currency depressed is like artificially keeping labor wages down, or by the government commanding that prices be set at a certain level.

    The economic "game" gets out of proportion when the law of large numbers comes into play. Now China has to buy billions of dollars of US currency every month just to keep their currency down. All the U.S. needs to do is keep printing money, and China if the choose to keep growing through exports will have to buy our cash...it is a free ride (but a dangerous one) for the USA.

    China is a command economy - they are NOT a free market economy. The government pronounces they want millions of miles of high speed train track laid within 5 years and it gets done - with no regard to safety, environmental rules, etc.

    The Chinese government commands they want 9% GDP growth for certain cities within China and it is the local governments responsibility to make it happen..

    How do you keep growing though at 7 – 10% a year....you can't do it forever. So you are seeing some very bizarre things in China. A great way to grow GDP is to build housing (i.e. what we did here in the USA the past decade). It takes lots of money, requires lots of purchases of steel, plaster, etc...and you are able to grow GDP quickly by building thousands of homes (yet entire cities). BUT - there is NO ONE living in them. Type in "China Ghost Town" or "China Ghost City" into YouTube to observe.

    China gets out of this by getting their citizens to buy and consume. 70% of the USA economy is lead by consumption (US citizens buying things). China needs to start having more of their economy be lead by consumption - and not exports.

    Though I am scared for the USA...we actually hold a lot of the cards. It is much like when Donald Trump couldn't pay for his real estate holdings - he ended up being ok. There is a saying that goes something like... If you are overextended in loans, the bank owns you. But if you hold most of the loans of the bank, you own the bank.

    August 14, 2011 at 6:14 pm | Reply
  15. andrew

    Is Fareed Zakaria a Jihadist incognito?

    August 14, 2011 at 6:15 pm | Reply
  16. bhagatt

    Not so easy. America is not safe by a long chalk. The simple truth is that even if currencies equalize and the US dollar falls, US manufacturing is practically non-existent (after decades of outsourcing to lower cost countries). So even if the US dollar becomes cheaper it will take a long time to rebuild factories and create an efficient, modern manufacturing base.

    August 14, 2011 at 6:17 pm | Reply
    • Tom

      True for some industries, but you mean to tell me that Coach can't make a stupid handbag here in America?
      Puhleez! They were founded in New York City for gawds sake!

      August 14, 2011 at 10:42 pm | Reply
  17. Habib

    Missa Fareed, why you no wear turban?

    August 14, 2011 at 6:18 pm | Reply
  18. Joe

    Who cares what a terrorists thinks of what China's opinion is.

    August 14, 2011 at 6:18 pm | Reply
  19. Greg Autry

    Good piece Fareed. It is rarely pointed out that China buys bonds primarily to maintain it's currency manipulation game. Not because they are dumb enough to think it's a good risk reward bet. The Chinese bloggers are right, they should stop!

    The crucial next step is to admit the currency manipulation scheme has a purpose as well – kill off American (and Asian and European) industries one at a time in order to grow China's list of monopolies. Cheap labor is NOT sufficient to make it economical to ship steel or drywall across the Pacific. It doesn't even justify iPhone production because labor is a small factor there. Currency manipulation driving the price of Chinese materials down 40% and thereby buying US bonds to support that is key to gutting Americas jobs.

    We need to stop funding our own demise. As you note we are paying China interest every second. Why? To keep rates low. Four years of that have done NOTHING because bankers do not want to invest those cheap dollars in America. We don't need cheap capital that goes abroad or sits in banks we need to keep our jobs!

    Stop selling bonds to China or any currency manipulator. Rates will rise. Thats OK if we pay the higher returns back to Americans and close this leakage.

    Greg Autry, co-author of Death by China

    August 14, 2011 at 6:20 pm | Reply
  20. Deep North

    i JUST LOVE THE COMMENTS WHEN ZAKARIA HAS SAID....."This is a huge hypothetical " He is playing make believe so the entire article is bogus!

    August 14, 2011 at 6:23 pm | Reply
  21. The Dude

    Why is this foreigner saying "us" like he is an American?

    August 14, 2011 at 6:23 pm | Reply
  22. Jorge Barreda

    Mr. Zakaria: You are misinformed

    In your analysis, you miss the fact that, whether through CIC, its State-Owned enterprises, and even its privately held conglomerates (who have access to Government subsidized loans), China is acquiring land, copper deposits, lithium brines, and in general, everything that means access to the world's natural resources. And they do this for strategic as much as for financial reasons. China going outbound is perhaps the largest portfolio rebalancing exercise ever carried out in history. If current trends continue (China outbound M&A activity to the tune of $90-100bn/year), in 5-10 years China will have divested the majority of its Treasury holdings, will have secured dominance in the world's commodities markets, and will have hedged its savings portfolio against the expected structural depreciation of the USD. While your analysis is partially true, it is also incomplete and short sighted at best.

    Best regards,

    JB

    August 14, 2011 at 6:23 pm | Reply
  23. bob

    Not once was the Chinese consumer mentioned. The escape route for China is to slow down the US treasury buying and the same time, increase internal consumption. This will happen, but slowly and surely, it will happen, because staying with the alternative, the US dollar, is catastrophic.

    August 14, 2011 at 6:25 pm | Reply
  24. capnmike

    No, we do NOT need to "cure" ourselves of debt...we need to CURE ourselves of BUYING GARBAGE FROM CHINA! Go look in the stores...Almost EVERYTHING is "made in China". THAT is why we have no jobs here and our economy is in such bad shape...we are sending TRILLIONS of dollars to China to pay for all this stuff. DON'T BUY CHINESE-MADE GOODS! The government should STOP giving tax breaks to any companies who import or sell non-US-made finished goods, and slap a 100% import tariff on all these imports. More income for the government, more jobs for Americans. Let's bring back "MADE IN USA"!!!!!!

    August 14, 2011 at 6:28 pm | Reply
    • Lost Generation

      Well, there 70% – 80 % of americans like "Made in China" They are extremely huge fan of "MADE IN CHINA". Americans have Iphone, imac, nintendo wii, etc... They love "MADE IN CHINA"!!!

      August 14, 2011 at 6:33 pm | Reply
      • Christopher

        They like those things because the things made in China are of comparable quality (and much less cost) to things made in the United States today. Now, should the United States be using our dollars to encourage China to put into place environmental protection laws like we have? Yep.... punitive tariffs for things that come into America from China that are not made in an environmentally friendly way would put us down the path to that.

        August 14, 2011 at 10:28 pm |
  25. andrew

    Help me on this. if i remember right we, the USA started outsourcing manufactured goods decades ago. It began to be too costly with the UNIONS grip on business. As the unions demands for money and being able to sit around and get paid for nothing, that added cost was passed on to the consumer. So, if business could not satisfy the unions, they go out of business. They had no choice but to go to Asia for cheap labor. Canada, India, Mexico is included. Not just China.
    Its bigger than just one country. When did NAFTA start

    August 14, 2011 at 6:31 pm | Reply
    • J3sus Sandals

      NAFTA is irrelevant, there are no tariffs on weed and coke.

      August 14, 2011 at 6:40 pm | Reply
      • andrew

        Ha

        August 14, 2011 at 6:49 pm |
  26. jwb

    I've been predicting this for years. The COMMUNIST CHinese do not care about their economic problems. They are out to destroy us buy selling us enough rope to hang us with that very same rope. Yet, the corporations just can't get over there fast enough to hire their workers at dirt cheap wages. Our politicians can't "kowtow" to them quickly enough and our govenrment can't spend us into oblivion fast enough.

    Our nation has to get its finances in shape. Bring the jobs home. Re=build manufacturing in this nation. Allow businesses to create new jobs. If we don't? Then we are doomed.

    August 14, 2011 at 6:32 pm | Reply
    • J3sus Sandals

      Yes, let's create the smog and pollution necessary to resurrect the manufacturing sector and bring back the "local" economy. I'm in.

      August 14, 2011 at 6:44 pm | Reply
      • jwb

        II will accept some smog if AMERICANS are working. YOu'd prefer we all just work for the government in offices producing nothing but paperwork. That is what has us in this mess to begin with.

        August 14, 2011 at 6:51 pm |
      • Christopher

        With all due respect, we don't need to bring back smog and pollution. Efficiency in the manufacturing industry has gotten to the point where solar power (almost totally clean once the manufacture of the solar panels is done) could supply their power needs.

        August 14, 2011 at 10:14 pm |
  27. jwb

    stop buying products from China.

    August 14, 2011 at 6:33 pm | Reply
    • Jim

      I'd like to, but America companies won't let me, because they make everything there.

      August 14, 2011 at 9:06 pm | Reply
  28. USD

    the yuan and USD is FIXED and pegged to the USD and is not allowed to be traded in the forex market so accusations of forex manipulation is HOGWASH. Central banks cannot control the value of their countries value in the international forex markets which are determined by international banks who float it. All the banks are involved in currency trading but cannot trade the YUAN in forex market like the USD or other currencies that not fixed rate

    August 14, 2011 at 6:33 pm | Reply
    • roger

      How do you think a peg works? In an export oriented economy that's not a GDR-DDR style "we say 8 Yuans are 1 Dollar" kind of proclamation! Whenever the Yuan is under pressure to appreciate, the Chinese buy Dollars and put more Yuans on the market (i.e. they increase the supply of Yuan on the market)... that's the manipulation bit because on a free float, no one would be there to "support" the currency.

      August 14, 2011 at 6:45 pm | Reply
  29. Lost Generation

    America were suppose to INVENT... Not grabbing wages like PIGS.

    August 14, 2011 at 6:34 pm | Reply
  30. Matt Yates

    I didn't read the article, since I have never previously been very impressed with any of Zakaria's opinions. I don't understand why CNN keeps giving him such a prominent soapox.

    August 14, 2011 at 6:38 pm | Reply
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