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. X in LA

    China is an investment and consumption led economy, not exports.

    Exports is 25% of China's GDP and 20% of that is to the US.
    Exports is also 25% of Canada's GDP and 75% of that is to the US.

    Canada will collapse LONG before China does.

    Exports are 36% of South Korea's GDP.

    Why does no one say "lolol South Korea doomed"?

    In fact, the BEST THING EVER for China, would be for the US to default.

    Yes, we'll lose 1.4 trillion in paper wealth. Then the US will no longer exist. The implication of default is social program cuts. Imagine what the 32% of the US that's Mexican or black, uneducated and heavily armed will do, when the welfare checks stop coming in?

    August 14, 2011 at 6:41 pm | Reply
    • J3sus Sandals

      But the USA will collapse LONG before Canada. At least Canada has natural resources and primary sector manufacturing – logging, gold, diamonds, oil (tar sands), natural gas, fresh water reserves, AND functioning social security, health care, and intact civil works infrastrcuture.

      BTW, did I mention they have the lowest debt burden in the G8? You're just jealous.

      August 14, 2011 at 6:51 pm | Reply
    • J3sus Sandals

      Central Canada produces more vehicles each year than the neighbouring U.S. state of Michigan – the heart of the American automobile industry. Manufacturers have been attracted to Canada due to the HIGHLY EDUCATED POPULAITON with LOWER LABOR COSTS than the US. Still think Canada will collapse?

      August 14, 2011 at 6:55 pm | Reply
  2. Theodore

    Keep outsourcing to China and keep dreaming about creating jobs in USA

    August 14, 2011 at 6:41 pm | Reply
  3. Dan

    I agree, Zakaria is nothing more than a very good talker. I'm from Canada and from an objective point of view, he merely makes arguments to stoke anti-Chinese fearmongering, like most of the media. I saw him in a Monk debate in Toronto and it's obvious he is supports creating a new "cold war" between the US and China, like most of the media, because there they need to blame someone.

    The fact is that China is an emerging super power. That does not mean it is game over for the US. It means we, in North America, need to change our education system, create a more skilled labour force and yes, increase the production of goods and serviecs that the world buys. No, it does not mean we need to put more tariffs on products created in Asia or call out the Chinese as the next boogey man. That isn't going to help us in the long term.

    Idiots like Zakaria are just pandering to popular media ideals of creating tension between two of the world's most important countries, who are probably going to just end up being two of the world's largest trading partners and live a peaceful co-existence as these two governments try to do the best for their respective citizens.

    Creating an "us versus them" mentality isn't going to change one thing. Zakaria is only good at painting the Chinese as the enemy, which is funny since he's representing himself as a "true American" when he is from India. The two economies of China and US have had a very successful and beneficial relationship for a long time now, while India has lagged because there are too many Indian companies that are fraudulent, undependable, or untrustworthy.

    Zakaria doesn't propose any practical solutions. It's time to stop complaining about China (because it's obvious, that isn't helping) and start figuring out how to compete with China (on an educational, economic and fiscal restraint perspective). Yes, there is painful medicine in store for us to rectify the debt situation, but we have overspent, plain and simple, based on military, social and govermnent infrastructure). It's like a household that is $500K in debt, of course you are going to have to give up some items you are used to spending on every month. The US needs to raise some revenues and also cut spending. Polls have shown that most Americans already know and support that we need to increase some taxes for the rich, and cut government spending so that this out of control spending situation is rectified.

    August 14, 2011 at 6:42 pm | Reply
    • tonyl

      China does not play by the rules of economics. It wants to be a power but controls it's currency fluctuations and is a communist state. In the free world with free trade you have to play by the free world rules. It wants to become a power by using dirty games in economics. Lowest wages for workers, child labor, counterfeit products, corrupt laws, currency controls and all the other outrageous misdeeds. Then it wants to lecture the free world. China is rated AA- by the S&P. GO FIGURE.

      August 14, 2011 at 10:50 pm | Reply
      • 344

        The creditor (china) has a lower rating than the debtor( the US)..there is something wrong with all the US credit rating agencies.

        August 14, 2011 at 11:03 pm |
    • Don't blame Zakaria....

      He is giving you informed and researched opinion. He was born in India but educated in the best Universities of US. He has lived here for nearly 40 years. Remember this is his HOME and he is not trying to destroy it. By the way he is a Muslim from India. Does that mean he is trying to destroy USA & India and help Pakistan? You need to take a chill pill.

      He is neither anti China or anti US. It is beyond your thought process to understand his comments. Get some more education & you will understand his explanation.

      August 15, 2011 at 12:21 am | Reply
  4. freedom

    Very Interesting comments all..
    See we all agree with have a problem, lets fix it together.
    Thanks Zakaria for getting everyone talking again. Welcome back all to the new CNN " Were educated people communicate and others follow"

    August 14, 2011 at 6:44 pm | Reply
  5. Lost Generation

    How about write to GOP that you prefer all toys and electrics should print "Designed in the U.S.A.; Made in China" ?

    There are AMERICANS and GOP out there like "MADE IN CHINA" labels. They are super and super huge fans.

    August 14, 2011 at 6:46 pm | Reply
  6. Joe Greps

    Peter Schiff offered a great analogy about 6 Asians and an American washing up on a deserted island, they all take on a task, one makes a fire, one fishes, another cooks etc. At the end of the day they complete a meal and the Americans job is to eat it. When asked who the most important person on the island is the American explains "it's me! I keep everyone working!"

    This is essentially the logic the donkey that wrote this is arguing, it's incredibly wishful thinking.

    What WILL happen (and has been for months already) is the Chinese are allowing their currency to slowly climb and while American exports will drop their own people will begin see an increase in their own purchasing power. Much like the Asians on the island they wake up one day and realize they might just rather have the meal themselves.

    August 14, 2011 at 6:49 pm | Reply
  7. a disgrace

    thanks to the incredible failure of obama china owns america and can do what they please with it...

    August 14, 2011 at 6:49 pm | Reply
  8. Jo

    Hey, you got the attention of the freakshow MMTers over at pragcap!

    Way to go.

    August 14, 2011 at 6:52 pm | Reply
  9. yupyup123

    Zakaria's article is cognitive dissonance at its finest. China is doing the saving, producing, and more importantly, the under consuming, and they're not doing us a favor? Way to spin that one. Despite what Fareed may say (which is nothing but a rehash of globalist propaganda and the opinion of the PHD ivy league “hocus pocus” economists) China should have backed out of their currency and trade policies years ago. These policies have created major structural imbalances in the Chinese economy, which are going to have to be addressed; regardless if China likes it or not. This nonsensical idea that China has "no choice" is resulting in massive inflation as they monetize our huge budget and trade deficits. What China needs is to allow their currency to rise, stop buying U.S. government debt, pare their losses, and more importantly allow their economy to go through a recession and restructuring. America on the other hand is in for a world of hurt, as it will take years to rebuild our capital stock which has been severely depleted.

    August 14, 2011 at 6:56 pm | Reply
  10. QZ

    No 1 Winners: Capitalists in China and US
    No 2 Winners: Working class in China
    Losers: Working class in US

    August 14, 2011 at 6:58 pm | Reply
    • tonyl

      You are absolutely right. Corporate profits are up and all time high. Corporations are holding all their cash instead of reinvesting in this economy. They only invest overseas to hire foreign labor. Which allow the Chinese and Indian workers to benefits and their governments with tax revenues. Until we reverse this non sense, we will continue to go down.

      August 14, 2011 at 10:39 pm | Reply
  11. China who

    Finally someone comes out with closer to the truth about China. They don't own us, the are addicted to us. They need us as much or more than we need them.

    August 14, 2011 at 7:01 pm | Reply
  12. Lost Generation

    Here's problem in USA. America does not have CORE INNOVATION in 2008-2011. They ran out ideas.
    So you guy bunch of greedy and extremely expensive unions steal disadvantage dreams away and turn into unemployment.

    August 14, 2011 at 7:09 pm | Reply
  13. reiner

    Why should China do a favour for US?

    August 14, 2011 at 7:23 pm | Reply
  14. Chinese

    1. The comparison of Economic “doctrine” and the Military “Doctrine” is not correct or appropriate.
    Not only that economic policy should be a win-win that mostly based on the cost and benefit analysis, but also that we have no idea what exactly the economic “nuclear weapon” is as correspondent to the “nuclear weapon” in the military weapon technology? The invention of nuclear weapon in the 40s has changed the traditional weapon and military technology and doctrines. The MAD (Mutual Assured Destruction) doctrine is largely out of date and inappropriate to describe the cold war type or “zero-sum” game for US-China relationship…. We trust that Ted Koppel, David Brinkley, Eric Sevareid not to mention Walter Cronkite would use this analogy?
    2. Do Chinese papers have the right to complain the devaluation of the U.S Currency?
    Zakaria claimed that the U.S pays 74 million dollar a day to China or 833 dollars /per second. Or, can we say 38 million Chinese workers works one full year without pay, just because the 14% of devaluation of U.S. currency since Jan 2008 to August, 2011, less to mention of the collateral and consequential economic loss on the downgrade of the U.S credit?
    Said that, Zakaria is part of the messy democratic process to the coming best solution….

    August 14, 2011 at 7:36 pm | Reply
  15. mike

    Please call Obama and "ADVISE" him about this Fareed...

    August 14, 2011 at 9:30 pm | Reply
  16. Alfredo

    Perhaps the US shouldn't pay back it's debt to China. What is China going to do? stop shipping the US it's cheap toxic products. No Chinese made products?, I guess the US will have to start making things again. Sounds good....

    August 14, 2011 at 9:34 pm | Reply
  17. Howdy Doody

    Whatever. Sounds like an addict talking to me- weird contrived nonsense. I think the author included some quotes that inadvertently say it all:

    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."

    It ain't about what we think folks. Get it?

    August 14, 2011 at 9:38 pm | Reply
  18. Herman

    Barry is way over his head.

    If you voted for Barry Obama in 2008 to prove you were not a racist, vote for someone else in 2012 (anyone) to prove you are not an idiot.

    August 14, 2011 at 9:40 pm | Reply
    • Howdy Doody

      That's right- this whole thing is just a problem that could be solved by the right guy in the oval office- no deeper than that. Right. Right.

      August 14, 2011 at 9:42 pm | Reply
  19. jessicaber

    When I was a child in Lyndonville, Vermont and I am a 36 year old adult now in Montpelier, Vermont...many of my toys were made in China, maybe even my Geisha doll on my fireplace mantel was made in China. My father or some one told me China has got to be rich from making all of these toys. I can not help but think that all of this bad media is jealousy towards China and that they actually just deserve our thanks for making so many things that we love. They were in our service in that way. Why don't we jut say "thank you"?

    August 14, 2011 at 9:41 pm | Reply
  20. mike

    "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."
    HAHA, wut a 'HUGE NUMBER' to a 1.3 billion people country. Zakaria, u did a NICE job on math

    August 14, 2011 at 9:43 pm | Reply
    • Tony L

      He sure did. 74 million dollars per day = $833 per second ? Should it be slightly over $856 per second. They sure did their Maths alright.

      August 15, 2011 at 1:53 am | Reply
  21. vs

    Nice article Mr Zakaria. I completely agree with. China is not doing US a favor by buying Treasury Bills. They are trying to keep the value of their exports down, so that their goods always cheap. They are addicted to export based economy. They don't have any innovation of their own. All they do is copy or reverse engineer any thing that they can lay their hands on, which is why most of the US/European auto and other manufacturing companies are forced to share their designs with their Chinese partners. For Defense equipment, they have successfully reverse engineered airplanes and aircraft career of Russian origin. Nothing in their product line can be called their own. All they do is copy. I am surprised why they are not sued for patent infringement more frequently.

    August 14, 2011 at 9:44 pm | Reply
  22. Kuwait

    Here is what CHINA stand for:
    C = Corrupt Government
    H = Horror to
    I = International, Chineese citizens
    N = Never Trust the communist China on
    A = Anything

    August 14, 2011 at 9:48 pm | Reply
    • notYourMother

      Get You machine gun and stop all the republican and teabagger and White trash and evangelical Zionism to buy products from China in walmart. Go be a man ..

      August 14, 2011 at 11:51 pm | Reply
  23. finance

    I still cannot get it, in personal finances it's good to reduce your debts and become the lender, for proving that we've the banks and what they do to the people.
    Nevetheless, In governement finances, it's good to keep asking for more cheap money, increase the inflation to see the values of their debts reduced, and finally increase the taxes to the people, squeezing them like oranges to try to get out from the hole.
    Honest to God, I cannot get it, we in America might become just consumers depending on other countries to feed us, I see a lot of our skill dissapearing just because the companies are moving their factories offshore.
    Who in America will be able to create a motherboard to a computer?,
    we might send students to China to recover these skills in in the future if we need it.
    By the way, did the salary of the politicians in Washington is linked to the financial performance of our country
    Yeap, I know, I'm dreaming!!!!

    August 14, 2011 at 9:48 pm | Reply
  24. Ryan

    If China spent their dollar savings to buy goods then unemployment would drop, industry would boom and tax collections would rise. What a catastrophe. If they sold off the bonds over a few months the enormous bond market would hardly notice. Our country is worth 700 plus trillion and a couple trillion to the Chinese makes no difference... sensational politics.

    August 14, 2011 at 9:49 pm | Reply
  25. Riley

    It's all fine and dandy that they had to keep currency devalued. I agree with that. But riddle me this Mr. Zakaria, what happens if they announce a return to a gold standard and back up their money with only a little gold. Currency devaluation is what happens. Kinda puts a big hole in your argument doesn't it?

    August 14, 2011 at 9:52 pm | Reply
    • Paul

      Why would we care if China went to the gold standard? They own USD, we don't own Yuan.

      August 15, 2011 at 5:02 am | Reply
  26. john

    This article also same like any other articles of Mr. Fareed Zakaria, only to please brain washed Americans. How can an investment safe in bound with a country having more than 80% in debt? China is Definitely doing favor to US. US economy is in brink, that you have to accept.

    August 14, 2011 at 9:52 pm | Reply
  27. zander

    What amazes me is ppl talking about economy as though they understand it.. half of the morons who ask me questions dont have a clue wats going on.. they know more abt what happened in jersey shore... there are no jobs.. kids pay more attention to teen moms and jersey shore... they dont know who the vice president of the US is.. and we have ppl complain abt economy.. and i ask why.. oh.. the markets down.. seriously???

    August 14, 2011 at 10:02 pm | Reply
  28. Karin

    We borrow from China to give Federal Aid to other Countries...Does this make any sense to you?

    August 14, 2011 at 10:02 pm | Reply
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