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. Dan

    Fareed:

    Usually love your show. However, last 2 paras shocked me:

    "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."

    You are talking about US paying China interest every second forgetting they are giving is 40-60 times more principal per second. Saying China does not have too many options may be fair. But saying we are doing them a favor is down right delusional & arrogant!

    August 14, 2011 at 10:02 pm | Reply
    • Paul

      Lol, so us not purchasing trillions of dollars worth of goods from them is not doing them a favor??? Are you that delusional?

      August 15, 2011 at 5:03 am | Reply
  2. JJ

    The real culprit here is not the chinese, but rather the American fools who complain about losing their jobs and owing china so much money, but where do they shop? In precisely the same places that export our jobs to china, places like Walmart (a.k.a. China, Inc.). I really have no pity on people who are so stupid they can't see two inches in front of their faces just how much they have sabotaged their own economy.

    August 14, 2011 at 10:02 pm | Reply
  3. chris

    The government and many others tell us Americans to live within our means...and now this!! I believe it is time to stop worrying about other countries and start taking care of our own!! Stop borrowing and getting deeper in debt..stop accepting Illegals into our social security without working for i.e. getting legal citizenship and working for it like we legal Americans have all our lives and stop spending 10 million dollars a day in useless wars that do not need to be. Our founding fore fathers are literally turning in their graves at the non-sense this country has bestowed upon itself. Great job Obama and all the other worthless Government officials. The once Super Power of the world is quickly becoming a thing of the past and I fear that my Son's future will be very hard at the expense of such foolishness. American politicians are throwing caution to the wind at our expense!!

    August 14, 2011 at 10:08 pm | Reply
  4. Dave

    If have lost site about what this country was builded on. Surely not made in China or other countries. We aloud corporate america to send jobs overseas. So, if you think about it, we did this to ourselves. What one forgot about; if you continue to send the jobs overseas, who is going to be able to afford there product. Greed, became the norm, and now we are paying the price. Until we get back to: Made in America, we may never see that american dream continue to come true for our children.

    August 14, 2011 at 10:09 pm | Reply
  5. Gary Villani

    Dear Mr. Zakaria, CNN Editors, and fellow posters,

    In September of 2009, President Barack Obama signed a thirty five percent tariff on Chinese tire imports, following the lead of the United Steelworkers and the World Trade Council. This under-publicized fact serves as a strong example of how union activism still helps. It also demonstrates how important it is to have a Chief Executive in the White House who understands the reality being faced by millions of American workers.

    Consider this: The three-year, temporary tariff President Obama imposed was the first such action taken by the United States in over a decade. That executive decision helped the blue-collar bottom line in an historic and meaningful way. Frankly, it may have saved many of our best-paying local jobs, here in Fayetteville, North Carolina. Critics called it ‘protectionism’. Realists—also known as people who feel blessed they still work for a living—call that kind of action ‘self-defense’. In the two years prior to the Obama Administration’s vital counterpunch, Chinese imports of cheap—and often low-quality—tires onto our shores had more than doubled. In that same period, five U.S. and Canadian tire factories shut down.

    The direct result has been profound. North American tire industry workers—including over 3,100 Goodyear employees in Fayetteville, North Carolina—are now competing against over 18 MILLION LESS Asian imports a year that once unfairly flooded our markets, due to still-off-balance trade laws.

    It’s hard enough trying to compete against slave labor.

    Taking on China these days takes courage. Sadly, the worst offenders of basic human rights in the civilized world have become our primary source of credit, our defacto landlords, and—thanks to Wal-Mart—our number one employer… but they are NOT our masters.

    The brave decision by President Obama to side with organized labor saved middle class jobs—and bolstered local economies—everywhere a tire factory still operates in North America.

    We, the union-dues and tax-paying people in the “Made in the USA” tire manufacturing industry, are no doubt an endangered species, but thanks to the commitment of our Labor leaders—and President Obama's courageous fulfillment of his campaign promise to stand with us—WE AIN’T DEAD YET!

    *****

    —Gary Villani works as a machine craftsman and as co-captain of the fire brigade at Goodyear-Fayetteville. He also serves on the executive board of United Steelworkers Local 959, and as editor of their newsletter, The Local Express. In 2010, Villani suffered a broken neck during the rescue operation of a co-worker. He is continuing to recover.

    August 14, 2011 at 10:11 pm | Reply
  6. ed sr

    Zakaria is VERY correct....................as Nostradamus wrote..............BEWARE the sleeping dragon!

    August 14, 2011 at 10:15 pm | Reply
  7. RU

    All the us got to do is print the money,and over acouple years, pay off any of the debt. Money has to be printed or all the ecomonys will collapse, its pretty simple. Cash was never backed by gold, it was backed by labor. As long as the US companies keep accepting US dollars from other countries, the dollar will never lose it's value. Where has all the money come from that each country has, it has been printed under the illusion that it was backed by gold. When the world realizes that money has to be printed, and inflation controlled, then you will no longer see disease, famine, an evil on a rampage......the question is how long to get to that point.....you can change the world when the world understands the true gift of currency, until then, you will be caught up in your own illusions, sorry to say.

    August 14, 2011 at 10:16 pm | Reply
  8. Levas

    Henry Kissinger said that the U.S.A. needs to find common ground with China, find what it has in common with China instead of emphasizing the differences. This common ground is important to the U.S.A. in order to work towards China being a military ally instead of an enemy. The author has just pointed out one common ground-that of China's need for our T-Bills and our need to sell our T-Bills. Can we build more common ground from there?

    August 14, 2011 at 10:17 pm | Reply
  9. Travis

    I did the math too.... There are 86,400 seconds a day. 74,000,000 / 86,400 = $856.48 per second.

    Just felt the need to point that out.

    August 14, 2011 at 10:18 pm | Reply
  10. Brandon

    When you don't pay back your mortgage, yes, the lender loses, but you lose more – your house. US is not just owing to China but to many countries. They are investing money in US, buying US assets – and there are many other options. What purpose of this article is serving, to make us feel better about our own financial irresponsibility? or blame China? even if China forgives 1.2 trillion debt it holds, we still have >90% of our debts out there. We need to fix our own problem.

    August 14, 2011 at 10:20 pm | Reply
  11. Klaark

    The world economy is based of usury, making money work instead of people. Money shouldn't grow on its own when no goods were produced or services rendered. The economy is run on debt. Just about every world religion has banned usury, there was a reason behind that.

    August 14, 2011 at 10:24 pm | Reply
  12. USD

    china can just dump all it's 1.2 trillion US debt in the open market and buy euro other stuff. China US debt holding is it's foreign reserve. don't you get it. China doesn't need to forgive the 1.2 trillion debt. it just sell it.

    August 14, 2011 at 10:25 pm | Reply
  13. jay

    It's the price the US government pays for it's MN Corporations greed to run to China and outsourcing all the jobs. So for the cheap consumer goods one gets, made in China, the US government pays China $833 per second. Where is the benefit for the average American in this ? Also the US MNC parks the profits from operating in China in tax free Hong Kong maybe and does not put it to use in the US. Only a handful seem to be benefiting from this !!

    August 14, 2011 at 10:27 pm | Reply
  14. William

    Hey Mr. Zakaria, you should take up a job with the Chinese government; you're pretty darn good at this whole propaganda deal.

    August 14, 2011 at 10:28 pm | Reply
  15. USD

    pimco said it dumped all US debt for it's private clients. mostly foreign central banks or soverign wealth funds own US debt

    August 14, 2011 at 10:28 pm | Reply
  16. tonyl

    China is taking undeserved advantage of US from all sides. Congress knows this fact but due to the big business corporate lobby and pressures, continues with the import policies in destruction of the US economy which gives advantage to the corporate profits. Free trade or open trade destroys US jobs but benefits US corporations profiting from Cheap labor costs. China's pumping of cheap goods in US is the main reason for US labor markets collapsing, which caused the tax revenues to dwindle and for the US to fall in to a depression. The trade deficits clearly shows we send our dollars and jobs to the China and India but they do not by 10% in return from US. This will never work unless we reverse this stupidity. We should have even trade policies. There should be some balance in import and exports policies. We should apply import taxes to make even the playing field for goods coming in the country.

    August 14, 2011 at 10:31 pm | Reply
  17. hullabulla1

    In my opinion, Either China is doing favor to us or we are doing a favor to them,they are playing their chess well and advancing on multiple fronts for their citizens at large. We on the other hands are enemy ourselves -not solving any of our real problems and trying to find other culprits for our problems. What we need is open national debate on each problem and then carrying the best ideas into action – solution lies within us only but we are looking at others

    August 14, 2011 at 10:32 pm | Reply
  18. Neil

    All the lib media trying to divert the real problem. Let's discuss economy & how bad job the current president is doing. Let's focus on creating jobs for Americans. Time for lib media start criticizing the current leadership. Let's not worry about China.

    August 14, 2011 at 10:34 pm | Reply
    • Steve

      We are doing this to ourselves. Everything we own is made in china.

      August 14, 2011 at 10:41 pm | Reply
  19. Mitch Skinner

    If China did start selling US treasuries, causing the dollar to drop, it would be a good thing for the US economy. It would make imported goods more expensive in America, and it would make our exports less expensive around the world. That means that many more people in the US and abroad will *buy American*, which means more US employment and a better trade balance.

    Some people have an irrational fear of a low US dollar. It's as if the dollar's value is some kind of national pride thing for them. But a low dollar means more employment in the US. Why do you think China's trying so hard to keep their currency low?

    August 14, 2011 at 10:36 pm | Reply
  20. justin

    WOw, seriously all take a step back. both countries need each other for different reason's. Nothing good ever comes from grand standing or war. The US & China like all countries a part of a global system that relay's on each party being stable. nothing good will come if either collapses. We all have to eat, stay warm and protect our family's, this doesn't mean we have to use the Stick, try the olive branch.

    Remember there are other countries out there as well, your world isn't the only world.

    Sydney, Australia.

    August 14, 2011 at 10:38 pm | Reply
  21. Jon

    2+2 = ?

    so lets see...obama's number one priority was "muslim outreach".

    fareed regularly meets with obama to discuss strategy.

    fareed's editor for GPS is amar bakshi.

    hmmmmmmmmmmmmmmmmmmmm........anyone else see how this all works? I do and am NOT afraid to say so...I could give a rats butt about politically correct leftism....

    America; wake up. this is a toxic group you chose to put into the white house. They are not there for the "change" you expected.

    August 14, 2011 at 10:39 pm | Reply
    • just me

      ditto

      August 14, 2011 at 10:41 pm | Reply
    • Jean

      You got a 5 or 12 or something for your total, Jon.

      August 14, 2011 at 10:47 pm | Reply
      • Jean

        come to think of it, your '2' and your other '2' were misidentified, as well.

        August 14, 2011 at 10:47 pm |
  22. just me

    sometimes i think this fareed guy is a terrorist playing journalist here in the us. he seems to be delighted when he talks about the downturn here and the other day he was interviewing his personal friend, the guy who wanted to build the mosque in ny, in an attempt to let the guy grieve and justify his idea as a total innocent move. he is a muslim probably and tries to create arenas in his show foe his nut brothers. wolf dressed as sheep.

    August 14, 2011 at 10:39 pm | Reply
    • Oyster

      Are you trying to be a moron on purpose? Quit embarrassing your fellow Americans with your posts for God's sakes.

      August 14, 2011 at 10:58 pm | Reply
  23. Chinese American

    I would not like to see cold war mentalities toward or China for obvious reasons. Even if China doesn't want the money, our government would still be greatly in debt to the American people. Solution is rather simple, generate more tax or reduce spending. Any us vs them mentality wouldn't solve problems...

    How to generate more tax?
    a. tax more
    b. more business revenue

    How to reduce spending?
    a. I don't know, maybe you do...

    August 14, 2011 at 10:40 pm | Reply
  24. rp

    China has been buying metals, both as investment, to safeguard their industrial base and to exit their dollar holdings. China has also been selling their T-Bills. China has also been on a buying spree around the globe and paying with, you guessed, US Dollars. China will not dump T-Bills or US Dollars, but they are for sure moving away from both. Your view of the market is very limited and you're misleading your viewers/readers. Stay with political analysis please.

    August 14, 2011 at 10:40 pm | Reply
  25. Jeff

    Bottom line: 40 years ago tomorrow on August 15, 1971, President Nixon took the US Dollar off of the GOLD STANDARD. Look up the video on youtube. The results of that are being felt now with massive economic volatility and chaos. Those of you invested in US dollar denominated "paper assets" are going to lose EVERYTHING once hyperinflation kicks in because of all the overprinting of ALL currencies worldwide. Get into gold and silver NOW. Be on the right side of history.

    August 14, 2011 at 10:41 pm | Reply
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