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. vijay

    NICE DAY DREAMING SIR !!

    August 14, 2011 at 10:43 pm | Reply
  2. rpfp2012

    Incase you missed it:
    http://www.foxnews.com/politics/2011/08/09/critics-question-us-aid-to-china-amid-debt-woes/.
    China needs our help so we are still sending aid to them.

    August 14, 2011 at 10:44 pm | Reply
  3. Jon

    and besides, have you all forgotten how obama was going to open his mouth and charm china into doing whatever he said.....man is he naive and so are all of you who believed him. He told you sweet lies and you actually believed him. You see, the ironic thing is this; bush, who the left hates, was an honest man who would tell you straight out what the deal was. You might not have liked it, but it was the truth and you always knew it. Now take Obama, who the left loves, who will lie straight to your face and you kind of know it and you STILL like him. .

    I'll take the less intellectual but honest bush over the lying smiling obama anyday.

    August 14, 2011 at 10:46 pm | Reply
    • seriously?

      Like that whole weapons of mass destruction thing. Honestly you look absolutely foolish with a post like that.

      August 14, 2011 at 10:48 pm | Reply
  4. Ted

    I think there are mutual interest for both 50%, (and 50% self-Interest motive).
    Guess what, if China parks its money in its own country, they would be better off, 20% appreciated over the last 3 years. So they are losing money parking its money in the state, ( really). I don't need to prove it, just look at the Chinese yuan value over the last 3 years.
    So you say, then why don't you park it at China. That's because there's a self-interest motive ( take a guess, i think you know why).
    Lastly, what if US didn't have 1.2 T dollars from CHina, do you think the interest rate would be higher. ( answer:yes).
    The china Self-interest motive has caused China some pain, expensive price to pay.
    So what they do, they add pressure to US, asking to US to protect its investment.
    But the US Gov. could not do much to control it, so China starts jumping up and down like a cry baby.
    Then your comment is doing the same behavior, jumping up and down.
    Be clam and be collective. Just a jitter, investment partners are feeling down at the moment. No need to judge.
    Will be out of the wood if we cooperative more, since China has more money in the bank now. :Let's build a good spirit and team work. After all, China is our customer, and customer has a right to complain when investment go south. You know how that's if you are in a financial industry, or any industry, You need to improve your service skills, when customer complain. If you ignore them, I promise they will go away, soon or later. Thanks for reading.

    August 14, 2011 at 10:46 pm | Reply
  5. Webspy

    Do'h

    August 14, 2011 at 10:46 pm | Reply
  6. Arvind Garg

    I am willing to pay $900 of my share to china, even though I am not US citizen, if US is willing to stop borrowing from China. Being in US for more than 5 years now, my house is full of 'made in china'. I wish my dream to see 'made in US' at my home will come to true ever. Also, yes you for sure doing a favor to china by borrowing. Hope you realize this and try to stop this instead of being proud of it. It's dangerous to make a country like china so powerful.

    August 14, 2011 at 10:47 pm | Reply
  7. Bill

    Let's face it folks, China is like France, they dislike us because we pulled their butts out in WWII.

    August 14, 2011 at 10:49 pm | Reply
    • 344

      The China you talked about was the Nationalist chinese currently located in Taiwan.
      So, Americans were doing the Communist China a big disfavor by helping the legitimate Chinese government back then.
      I guess why they hate Americans so much.
      So please learn your history.

      August 14, 2011 at 11:08 pm | Reply
  8. 344

    Americans accuse china of manipulating currency
    China manipulates its currency by buying Treasury bonds and not letting yuan float.
    Americans do not want China to dump the US treasury bonds, but do not want China to manipulate its currency.
    What exactly does America want?

    August 14, 2011 at 10:49 pm | Reply
  9. Will

    Relax America. Our fiscal policy and dollar are absolute basket cases for sure, but the rest of the world are even WORSE basket cases, so there is no need to worry!(The people giving thumbs up to the article will give thumbs down to me, even though I just said the same damn thing).

    August 14, 2011 at 10:52 pm | Reply
  10. $$$

    of course , they are not idiots!!! when it comes to $$$, everyone has an agenda, no one does anything just out of goodwill

    August 14, 2011 at 10:52 pm | Reply
  11. China!?!

    We should not be worried about China they are rapidly developing but they have an even greater gap between the rich and poor than we do. A large majority of their population are poor. They are going to have a lot more problems in the future than we are.

    August 14, 2011 at 10:54 pm | Reply
    • USA

      The difference between the poor in China and US, their life is better each day and we are sinking.

      Do you think we can live without TV, computer, coffee or beer for just one day?

      August 15, 2011 at 12:20 am | Reply
  12. YoDude

    i let Mike borrow $10 bucks so that he could get ten candy bars to eat for lunch. He paid me back the next day. The next month, i let him borrow $30 bucks to buy 30 packs of Skittles for lunch. He paid me back again the next day. Joey borrowed $30 from Bob, but never paid Bob back. Then Joey came to me one day and asked for $2. I said "no." He went to Sally and asked for $1 so he could get a snickers bar for lunch, because he was starving, but she said "no."

    August 14, 2011 at 10:57 pm | Reply
  13. 344

    is this guy trying to make US go to war with China for his motherland India?

    August 14, 2011 at 11:01 pm | Reply
    • That was real moron thought. You racist bum...

      Chinese have infiltrated enough people into USA. who will fight for China from within the walls of USA.

      August 14, 2011 at 11:55 pm | Reply
  14. Desi Babu

    Nice story Mr. Zakaria! But, I think there is no need for Americans to keep obsessing about the debt. It is more important to rebuild the economy, and bring back the faith in the country. I wrote a little piece here about this whole issue:
    Pay Money to Pay Money (http://peanutexpress.blogspot.com/2011/08/pay-money-to-pay-money.html)

    August 14, 2011 at 11:02 pm | Reply
  15. molarband

    why are racist comments about Chinese people accepted in the media but not allowed for any other racist. The Chinese are being used as a scapegoat for all of Americans problems which is not much different from how the Jews were used as a scapegoat for Germany's problems during WWII. Such racist comments need to stop! Just plain sickening!

    August 14, 2011 at 11:02 pm | Reply
  16. wot

    The US needs slavery back in order to turn their current condition around! Repeal the 13th amendment! If an American gets only 7 dollars in food stamps and some who is not a citizen of the country gets 200 dollars in food stamps, then let slavery return! China would not be able to say anything because their people are slaves already!

    August 14, 2011 at 11:06 pm | Reply
  17. Trout Tracker

    China's central bank MUST constantly buy our Treasury bonds. In order to keep its currency fixed against the U.S. dollar (which they do by law) , they to be able to redeem one U.S. dollar for every 8 yuan. As their economy grows, they buy more and more U.S. currency to meet the growing number of yuan.

    Why would they want to destroy, much less weaken their greatest customer ?

    August 14, 2011 at 11:07 pm | Reply
  18. thinkvd.com

    In the devaluation of money, this is a good thing?

    August 14, 2011 at 11:16 pm | Reply
  19. The Doctor

    To the person who said no one has ever gone to war over debt: You might want to look at the historical context of World War 2. What was Germany's primary motivator for invading its neighbors? They owed EVERYONE around them money (war reperations) and it was strangling its economy, causing severe depression and hyper inflation. World War 1 had similiar context, with debts being a big motivator from the Franco-Prussian war, although not nearly as bad as WW2.

    Now to China: China -CAN NOT- go to war with the United States. It simply doesn't possess the logistical capacity to sustain long term conflict with the United States. Meaning, it can't support the supply lines necessary to project force beyond 500 miles from its borders. Let this sink in: It is simply impossible for China, any time in the next ten years, to be in a military position to sustain a conflict of any significant intensity against the United States far from its shores. People talking about the aircraft carrier should realize that this is a (half-hearted, and ultimately futile) gesture towards the US, primarily about Taiwan. According to the NIE on China several years ago, the majority of its military build up has been focused on the areas surrounding Taiwan. The person who made the comment about China's navy/airforce being largely under-trained in comparison to the US is correct in their assessment that they would not pose much of a threat. And regardless of their standing army/reserve numbers, as I said before, they DO NOT possess the logisitical capacity to sustain a conflict against us, outside of the Taiwan issue.

    Zakaria is right in the respect that China isn't doing us a favor, they have very little choice in the matter. They have "boomed" in the last 20 years because of the trade surplus with the US and they have locked themselves into a vicious cycle. Eventually, they will develop a counter-strategy to this problem, and you are seeing this now in several ways. 1) They are aggressively moving into the Euro-zone markets as a place for their goods, but the sales numbers can't replace the bulk of the purchases made by the US. 2) They are aggressively using their dollar reserves to buy hard-commodities in Africa (i.e. – Sudan, oil, etc) 3) They are making long-term shifts in energy resources with Iran, India and Russia (The SCO). The reality is: even if China wanted to stop purchasing Treasuries, they really don't have many options in the short-term. Ten years from now, however, may be a completely different story, and I believe there will be a slow shift in this economic dynamic over the next 10-to-15 years, but for the moment: China still needs the US. We are the primary economic motivator for China, and their massive infrastructure projects (and yes, military build up) is directly funded by their exports to the US.

    This is not a situation that developed over night. It has been 20-30 years in the making, and there WILL BE severe consquences for both China and the US, but not for some time, as both sides need each other for the foreseeable future. China is aware of this reality, as is the United States. The historical pattern might be for the United States to tank its own economy and deflate and devalue its currency so we can pay China back with worthless paper. This possibility is -very- debatable, however, and I think it somewhat unlikely that this will be the United States' method for paying down its debts to China.

    August 14, 2011 at 11:17 pm | Reply
    • USA

      Thank you.

      August 15, 2011 at 12:11 am | Reply
  20. oldboldgold

    I don't always agree with Fareed, but at least he INVESTIGATES. He has an informed opinion, right or wrong. Why is he the only one?

    August 14, 2011 at 11:19 pm | Reply
  21. Curtis

    Look everyone thinks that china owns our econmy. Not really we own theres sure they own a majority of our debt but then they relie on us for everything. All we have to do is cut them off and they are screwed. Without us bying their goods they are so done. Right we are making them a super power not them selves. In short we own their econmy

    August 14, 2011 at 11:21 pm | Reply
  22. Paying or Printing

    "U.S. pays out some 74 million dollars to China in interest payments on debt every day.', "833 dollars every second" Sounds good but the problem is US PRINTING 74 million/day, 833/ second

    August 14, 2011 at 11:22 pm | Reply
  23. Will

    No matter how you look at it, this whole system is a house of cards that WILL collapse sooner or later(probably sooner).

    August 14, 2011 at 11:22 pm | Reply
  24. E.S

    Good reporting!!!! Thats what keeps me interested in still watching and reading the news Goodwork

    August 14, 2011 at 11:25 pm | Reply
  25. JAY

    Is china really depending on USA to buy its goods anymore. Today entire world is a buyer of chinese goods even the under developed countries, developing coutries alike. Take for instance India, you see chinese goods everywhere.

    I feel that today USA needs china more than ever simply becuase we are so used to buy cheap things that are made in china. China can easily keep its workers busy by suppling goods to rest of the world.

    We need to have alternate to chines goods to have a upper hand on china.

    August 14, 2011 at 11:27 pm | Reply
  26. jojo

    Zakaria:

    Stop blaming the Chinese. They did not force the usa to cut taxes recklessly as Bush W did. They did not force the USA to run a huge deficit.

    August 14, 2011 at 11:27 pm | Reply
  27. I Banker

    The math speaks for itself...China parks all its world earnings including export earnings from US here and even earns interest in the safest sovereign debt in the world... It needs wealth & wants to be the strongest economy..Cant become one by becoming the largest consumer in the world.... So they need the Americans to consume...for which they will do anything.

    August 14, 2011 at 11:29 pm | Reply
  28. Modern Philosophy

    China never declares war.

    August 14, 2011 at 11:29 pm | Reply
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