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. Jadot

    I had the pleasure of listening to Donald Trump on CNN recently – he is a real asset to the US, sees clearly
    the managerial shortcomings, doesn't mince words, is not full of Guff & Fluff, and above all views China in the
    true light – a real danger to the US.

    August 14, 2011 at 11:31 pm | Reply
  2. JoeHammer

    This article is nothing more than a smoke screen. It diverts readers' attention to China and take us away from the real problems in the US. We need to create jobs in America, and this is real. BIG CORPS are the problems here. They pledged their allegiance not to the USA but to money. They set up CORP. headquarters all over Europe and other parts of the world so they can avoid paying he 35% tax (in some European countries BIG CORPS only paid little over 10% tax). Congress needs to close this loop holes and make the BIG CORPS pay their fair share of tax. We us Americans need to organize and boycott BIG CORPS that don't pay tax and outsource American jobs overseas. The problem isn't about whether or not China will buy our bonds, we need JOBS!!!

    August 14, 2011 at 11:33 pm | Reply
  3. Damian Palmares

    ann

    "For myself, I would rather have fewer things, but with more quality. I would rather quit buying from China, and bring back American, quality products, not the lower quality Chinese products(to all of you who keep berating America). That in turn may bring the jobs home. The government needs to have a plan to return jobs to America(to those who praise China and blast the US, how do you think China has started becoming middle class? Many US companies are there giving them jobs)I think the people should start complaining and bring American companies back home, even though its cheaper labor in China-wheres your patriotism?Your country needs those jobs, find a way to bring them back so you can earn enough satisfaction, is that so difficult or are ALL businesses too greedy and need to be boycotted by Americans who take their jobs overseas?I dont have any solutions, thats not my area of expertise, but I know there are plenty of intelligent, innovative Americans out there who are quite capable of creating jobs for people, thats what Americans are all about. We dont give up and we come back stronger. I call on BIG BUSINESS and CORPORATION and those with mpney in their pocket to make a differnce here since politicians can't.I dont like to berate people, but its a fact that China and a few others STEAL ideas(even making copies of original cities in other countries) . Shame on those who sing their praises , then blast the US who has helped many countries rise to midle class by exporting our jobs or importing their goods. Americans need to start looking out for themselves and insist that jobs stay here. I dont care if its cheaper to build something in another country rather than ship it, the government needs to help find ways to ship them cheaper, rather than building factories with our technology elsewhere.We help others and it only hurts us and allows us criticism from those who dont know who helped in the first place.And those businesses and corporations know who they are. We in fact helped India with our technical jobs and one company is bringing the jobs back home and I applaud that move. Our voices need to ring louder in this regard. I used to enjoy helping other countries, but there is no appreciation for it, all we hear are the negatives from the world because no one knows the reality. For those that wrote these articles, you should know, we are a resilent people, and when we are attacked verbally by people we have helped, we know its time to stop helping you. Now, if we can get the government to start listening up, because face it people, you work for we the people, and we need to make sure you get a pay cut because youre not doing well in job performance. We would all be fired by now!"

    Well said.

    I've actually read some interesting comments tonight, although I haven't made it through everything. Usually it's the typical one or two liners of dribble in the comment section at CNN and then someone starts accusing someone of being a bush or obama lover, so I usually don't read comments here that much.

    Was a good article too...I'll post something later.

    August 14, 2011 at 11:38 pm | Reply
  4. faberm

    This is a very good article. It is easy to understand and makes alot of sense out of the confusing things we see.

    August 14, 2011 at 11:40 pm | Reply
  5. Joe O'Neill

    Eventually, Americans will learn what the initials VAT mean – Value Added Tax. It is becoming very clear that the only tax that Americans will ever accept, one that everyone participates in proportionately to consumption is a VAT. The U.S. is also the only industrialized nation that doesn't have a VAT. So brace yourselves. Here it comes. Don't be surprised if a Republican or perhaps even a Tea party linked President supported by Congress, is the one to implement it.

    August 14, 2011 at 11:47 pm | Reply
  6. Will

    Not to be a Bible thumper, but there is a Proverb which states the borrower is a slave to the lender, and the lender is a master to the borrower. No matter what religion you have, or don't have, that is something to seriously ponder.

    August 14, 2011 at 11:49 pm | Reply
    • Jefe

      The Bible is TOTALLY where we should look to for our economic advice.

      I'll repeat what others have said:
      If you (the borrower) owe someone $500, $500,000, or even $5,000,000... that's your problem
      BUT If you (the borrower) owe a NATION almost 1/4 of its annual GDP... that's THEIR problem.
      (China owns $1.2 Trillion of US "debt"; China's 2010 GDP was approx. $4.99 Trillion (USD equivalent))

      August 15, 2011 at 1:32 am | Reply
  7. Shaji

    One important fact is that china has offloaded 1/4 of their dollar holding in the last 6 months from 1.6 Tr to 1.2 Tr. Till Dec10 their dollar holdings were going up. It will be useful to check whether China is till Buying T bills. It seems that China is shedding their dollars in natural resources like Gold, Silver Rare Earths etc. However they need US for now, but how long?

    August 14, 2011 at 11:52 pm | Reply
  8. john huseby

    I agree with your observation but not with the recommendation. I've read your books and really enjoy them. As one of the blogs said, we need to change our culture to become leaner, more agile and seek higher quality. If there is a book that I'd recommend it would be: https://www.createspace.com/3361323 that explains how through lean, agile and six sigma quality we can multiply our return on capital investments.

    August 15, 2011 at 12:02 am | Reply
    • Damian Palmares

      I like six sigma...I've read a few of the books. They have good management strategies.

      August 15, 2011 at 2:23 am | Reply
  9. Sharky

    China has a huge and growing middle class. Soon, they will not need to export to the US. They have already slowed purchases of US Treasury debt and started moving that money into gold and gold mining operations. China is now the world's largest gold miner. In a few years, they will have built up significant gold reserves and have grown the middle class and they will remove the peg to the dollar. China will boom, and the US will bust.

    August 15, 2011 at 12:04 am | Reply
  10. James Reznor

    For those who think a military conflict with China is just irrational. We all loose from wars, look back at vietnam, Irak, Afganistan, now Lybia and who is going to be next. What a mess is going on with the NATO alliance, if we cant even deal with Libya and other Arab worlds, let alone china. We dont need any more wars, it costs too much blood , suffering and money. I do accuse China of currency manipulation, Its is affecting not only us but the world, but i dont think WAR is the answer.

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

    What always amuses me about comments to Zakaria's articles is that no one seems to realize he's not religious (even if he was raised Muslim) and that he was part of a conservative political movement during his University years–and that he actually self-identifies as a "centrist," not a liberal or a conservative.

    August 15, 2011 at 12:15 am | Reply
  12. Jimmy

    This idiot is an Indian. His biased opinion on China is automatically irrelevant.

    August 15, 2011 at 12:18 am | Reply
  13. Eric the Red

    IIt's going to end up China vs the rest of the free world. It is a point of terrible disgrace that we are trading with a totalitarian regime.

    August 15, 2011 at 12:19 am | Reply
  14. dadadi

    before we ask anyone else for favor, we need to ask ourselves: is our country doing us a favor?

    August 15, 2011 at 12:20 am | Reply
  15. A.W.Messenger

    This is a nice explanation of how interdependent China is to us, and vice versa.
    Thing is, the MORE debt China owns of the United States debt,
    The More China owns the United States.

    If we think about it democratically, change votes to dollars.
    The more dollars China owns of our debt, the more DIRECTIONAL power they have on how American chooses to do things: America's Fiscal policies, etc.

    If the trend continues over the next 30 years and the US national debt grows to $50 Trillion, it wouldn't be surprising to see the language of commerce change from English to Mandarin.

    August 15, 2011 at 12:24 am | Reply
  16. Miraclerose

    A most brilliant strategy by the Communist Chinese regime would be to begin investing in America....on the United States soil.
    Open manufacturing companies that the chemical uses could also be used for warfare. Invest in telecommunications, energy sectors, and other infrastructure.....especially power grids. Send their people over that are loyal to the Party. Have sleeper cells everywhere in America. When the time comes shut down the grid and as they have also been working on shutting down the military equipment.

    But then how could anyone in the United States be soooo stupid to allow this to happen. Oh yeah that's right they are allowing it though the Governors form and all the states saying please come here buy us up!

    August 15, 2011 at 12:26 am | Reply
  17. abcd

    China has much better capital mobility than what this guy said, US is the one that got trapped in debt frenzy.

    August 15, 2011 at 12:30 am | Reply
  18. Hiruu

    Fareed, Fareed, Fareed...you are so cut up in the hype...lol. You really expect us to believe that the Chinese are FORCED to buy our T-Bonds?!?! Really, as they can't start buying physical assets to a higher degree than they already have been doing, or continue to spend money on infrastructure development in China, which they have started doing. This works DEATHLY to America's interest, since as the Chinese become more consumer orientated, the impact of our economic viability is sapped. We lose our ONLY leverage over them...so please stop with these stupid columns you keep posting on how we our largest creditor somehow is trapped into buying our junk bonds. The real solution is for us to reduce our spending and start paying off the deficit, on a realistic schedule. If we could have a plan to pay down 50-60% in 20 years, America will be BACK IN BUSINESS!

    August 15, 2011 at 12:32 am | Reply
  19. Roger

    I generally agree with Sanjay's viewpoints in this article. However, what this article and many others like it fail to mention in regards to the subject of "worst case scenario" sell-off of T Bills is this: major holders of T- Bills like China would realisticaly never been able to dump all of their T Bill holdings. This is because interest on those bills is paid in dollars. As the heavy T Bill sales begin to cause a major decline in the value of the dollar, the T Bills themselves become less and less marketable. Ultimately, the demand for T Bills will decline along with the dollar, and large T Bill holders such as China will be stuck holding a whole lot of worthless bonds. This is a scenario that I'm sure pretty much all of the US' creditors would like to avoid.

    August 15, 2011 at 12:34 am | Reply
  20. Becca

    Awwwwwwwwwwwwww poor China they have a lot of nerve just about anything if you ask me. If our government did not allow them to bring their crap into our country to sell they'd be a no body too and guess what the americna people would have jobs.

    August 15, 2011 at 12:35 am | Reply
  21. Name*lorraine

    Not suprised one bit ' don't think anyone is Do you?????

    August 15, 2011 at 12:36 am | Reply
  22. Popcorn time

    I like Chinese.
    They only come up to your knees,
    Yet they're always friendly, and they're ready to please.

    I like Chinese.
    I like Chinese.
    There's nine hundred million of them in the world today.
    You'd better learn to like them; that's what I say.

    I like Chinese.
    I like Chinese.
    They come from a long way overseas,
    But they're cute and they're cuddly, and they're ready to please.

    I like Chinese food.
    The waiters never are rude.
    Think of the many things they've done to impress.
    There's Maoism, Taoism, I Ching, and Chess.

    So I like Chinese.
    I like Chinese.
    I like their tiny little trees,
    Their Zen, their ping-pong, their yin, and yang-ese.

    I like Chinese thought,
    The wisdom that Confucious taught.
    If Darwin is anything to shout about,
    The Chinese will survive us all without any doubt.

    So, I like Chinese.
    I like Chinese.
    They only come up to your knees,
    Yet they're wise and they're witty, and they're ready to please.

    August 15, 2011 at 12:36 am | Reply
    • AffleckChe

      I love china. And I like chinese.
      The US must be responsible for the drop of the ecnomy.

      August 15, 2011 at 1:27 am | Reply
  23. AlanInCA

    It's really simple. If nobody buys our debt then American can't keep spending at the same rate, and China will Export less to the US and China will have problems. We are in a deadly embrace. China wants to fuel our economy by buying our debt so they can keep their people working. Plus, they know that all of this debt is weakening the USA every day as we follow this INSANE path of borrowing.

    You don't have to be an economist to see what all of this borrowing is going to blow up in our faces someday. Our politicians must know the perils of what they are doing, yet they don't change the policy. What I can't figure out is who is benefiting from all of this and why it continues.

    August 15, 2011 at 12:39 am | Reply
  24. Gene

    " Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds. "
    "It would trigger panic selling of the dollar. That would in turn hurt the U.S. economy"

    Dear Fareed. This is not correct. It would be a blessing for American economy. FED would issues QE4 and buy up all the treasuries from Chinese for $1.2 trillion, perhaps, even much less. The real question is what would Chinese do with $1.2 trillion of American dollars? Buy up American goods, invest in America? It is long over due. The money has to get back into USA one way or the other. The whole "free" trade was supposed to function like that: we buy from them, then they buy from us and stimulate our economy. Both economies prosper. In really, Chinese take the dollars out from the
    trade circulation and loan them to our own government at very low (around inflation) interest rates.
    The end result from our trade agreements: Chinese get private sector manufacturing and engineering jobs, we get all kinds of government stimulated financial bubbles, inefficient government jobs financed on borrowed money and high private sector unemployment.

    Unless forced, Chinese will never buy as much as we buy from them, they will prefer to loan money to us. They do not
    need fair trade, it will slow down their economic growth. We must change our foreign trade agreements: the world must purchase as many goods from America as it sells to America. Other countries, including Chinese, effectively corrupt our political process by suppling our federal government with cheap loans. If you want economy to recover, request fair, balanced trade agreements from our government. Our foreign trade, our annual trade deficit is the fundamental source of our economic problems. It must be fixed. It is the only long term solution.

    August 15, 2011 at 12:41 am | Reply
  25. Gene

    AlanInCA,

    "What I can't figure out is who is benefiting from all of this and why it continues."
    The Chinese- they get the jobs and modern economy, the international companies- they get cheap labor and profits,
    our politicians- they get to borrow cheap money from foreign governments to spend and to get reelected. The only
    losers are American workers.

    August 15, 2011 at 12:52 am | Reply
  26. StrangeDays

    Another point I have yet to see made is the idea that if China makes any moves that would potentially destabilize their economy, the Chinese people themselves become a problem for the government. If what Zakaria is saying is true about their people being unhappy with the amount of debt China is buying, destabilizing their economy will likely lead to substantial unrest within China as well. The Chinese people are just getting a taste of prosperity. Taking that away wouldn't sit well and would likely cause the government significant problems.

    August 15, 2011 at 12:55 am | Reply
    • Andy

      While I'm here I have a question for anyone who might have any wisdom to share regarding this concern.

      From my understanding, over the last couple decades China has infused very large sums of money into it's economy. It is similar to the stimulus package that the US underwent over the last couple years. The difference is that China loans it's money to state owned banks and when the loans can't be paid back the government takes the bad debt off the banks books and holds it indefinitely. If the Chinese government can't pay it back what happens?

      August 15, 2011 at 1:14 am | Reply
      • Damian Palmares

        That's why it's so hard to really tell what China's economy is really like and what the true numbers are. Who is actually purchasing everything in China for them to get 10% growth, or thereabouts, steadily? They say the rising middle class, but there's still so many people there that work and don't make a lot of money. Look up China's purchasing parity power....it's not high at all. They are 94th at $7900 annually, along with Ecuador and Bosnia. We are at $47,000 per year. I don't buy it. I know we don't know everything here in the US, as far as the FED balance sheet is concerned, but we have a much clearer picture of the US financial situation than what's really going on in China.

        August 15, 2011 at 2:40 am |
  27. Miraclerose

    Gene

    China is buying up America. They are buying our gas reserves, power companies, telecommunication companies, precious metals, gaining citizenship in the United States under E-B 5 investment program. There is a map with the various things being bought out in our Country and most by the Communist Chinese Corporations. Just like Idaho now has a Solar manufacturing plant......60% owned by the Communist Government. Read the stuff and how easy it would be to pollute (even accidentally) the snake river. The Communist Government is also interested in two more energy projects. Our Governors are selling us out.

    August 15, 2011 at 12:59 am | Reply
    • silvershado

      Guess who owns the Chrysler Building? Arabs in Dubai

      August 15, 2011 at 1:17 am | Reply
    • Thomas Shafovaloff

      Why do you think Buffet bought that railroad? to carry coal to the ports from the China bought coal companies in America! You think they are just buying up Africa and South America......wait three months and take a look at your electric bill.

      August 15, 2011 at 1:56 am | Reply
  28. TheBossSaid

    Zakaria forgot to mention one very important thing: The entire Asian market is growing and becoming less dependent upon US exports and US dollars. When you have a billion people in China and if you're a business in China, you've got a lot of customers locally to choose from.

    August 15, 2011 at 12:59 am | Reply
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Post a comment


 

CNN welcomes a lively and courteous discussion as long as you follow the Rules of Conduct set forth in our Terms of Service. Comments are not pre-screened before they post. You agree that anything you post may be used, along with your name and profile picture, in accordance with our Privacy Policy and the license you have granted pursuant to our Terms of Service.