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. Biebs

    Well, I think people (us Americans) that get upset at China for looking out for itself are a little hypocritical. Don't we always lookout for ourselves? The important thing to remember is that every other country talks crap about us; sometimes we hear about it sometimes we don't, but it happens everyday in every other country. So why should we even care? They always say they are gonna do something to us, most of the time they don't, and when they do we kick their butts. So again, why do we care what they think? F'em if they don't like us.

    August 15, 2011 at 12:59 am | Reply
  2. Andy

    For the time being China needs US and European technology. The problem isn't when China decides not to lend us money anymore, the problem is when they have siphoned enough technology from us they won't need to pander to the US to sustain their economy anymore. American companies that operate in China are often required to share there technology with the government and it's no secret that they will steal anything they get their hands on.

    I don't have anything against the Chinese people prospering. I wish them the best of luck. Their government on the other hand are nothing more than self serving thieves that will do anything to remain in power and preserve a superficial image of having any concern for it's own people.

    August 15, 2011 at 1:00 am | Reply
    • Damian Palmares

      I fully agree...well said.

      August 15, 2011 at 2:43 am | Reply
  3. Fox Mulder

    *ahem*

    F@#k the Chinese.

    August 15, 2011 at 1:01 am | Reply
  4. x56s

    Owe them $200, that's your problem. Owe them $1 trillion, that's their problem

    August 15, 2011 at 1:03 am | Reply
  5. gaulix

    China is a smarter country than the U.S. because they plan their actions over 50 years.
    Some facts... 13% of worldwide high-technology products are exported from China, well above the U.S. ; and 40 % of its economy is based on high-tech products. Every years, 500 000 new engineers are graduated.
    Before the financial crisis in 2008, the China's economy was 35% of the U.S. economy. Now in 2011, it's 50% and if you add the currency devaluation, it raises to 75% of the U.S. economy. See the trend.

    Now, China plans to set the Yuan as the world's first reserve currency. The dollar will soon die and America will then agonise.

    August 15, 2011 at 1:05 am | Reply
    • FedupwithLA

      You probably speak the truth, but no one wants to hear it. Try telling this to the academics in this country. 490,000 out of the half a million that you mention of engineers graduated per annum are probably from U.S. universities. As said below in a comment by me, you cannot discriminate against them. You can only aid and assist them in taking over the world. That's only fair, you know. Let's be nice, please.

      August 15, 2011 at 1:18 am | Reply
  6. Benjamin Zhao

    How can I disagree with this author? If China is not doing US a favor by buying our Treasury bonds, then we must have done every country including China a favor by selling them our bonds. Considering the fact from the article we are paying Beijing 833 dollars every second because of the bonds we sold to them, we should find a way to stop such economic bleeding. Can we stop selling other country our Treasury bonds? Zakaria is a genius. What else can I say?

    August 15, 2011 at 1:08 am | Reply
  7. augdog04

    libby

    August 15, 2011 at 1:09 am | Reply
  8. FedupwithLA

    Yeah, but the Chinese are so cute, and you can't discriminate against them. How dare you?!

    August 15, 2011 at 1:12 am | Reply
  9. Alex

    Mr Zakaria, given the fact you never put any faith on the Chinese media, why would you want to make a fussy in its media story in the first place ?

    August 15, 2011 at 1:14 am | Reply
  10. Dino

    Where can I buy a Chinese flag?

    August 15, 2011 at 1:14 am | Reply
  11. Brian

    " Its state-run media thundered that America needed to "cure its addiction" to debt."............................................

    And America's media are run by business. Wonder why cnn doesn't mention this in every article. Maybe it's because they are a business?

    August 15, 2011 at 1:14 am | Reply
  12. Gene

    Miraclerose
    "Just like Idaho now has a Solar manufacturing plant......60% owned by the Communist Government."

    Well, something tells me if the global economy will collapse. The Chinese government bosses, their families will
    just emigrate to USA and keep the plants for themselves.

    August 15, 2011 at 1:15 am | Reply
  13. Gene

    "The reality is that China is trapped into a cycle of buying our T-bonds. "

    China GPD grows 10% per year. This is not trapped. This is full speed ahead into the future.

    August 15, 2011 at 1:25 am | Reply
    • Andy

      People have doubts about the actual numbers that the Chinese government gives out and they are basically basing their economy on a huge pile of bad debt.

      August 15, 2011 at 1:57 am | Reply
      • Gene

        just visit any walmart and stop dreaming up. check out cia.gov. they confirm the gdp numbers

        August 15, 2011 at 2:21 am |
  14. bronzezeus

    Fareed zakaria is a stupid idiot because all he can do is write down anything that comes to his mind and try to convince people with his dumb logic. Do the politicians and the media think that the people are mindless zombies and will believe anything that is told to them? The US is in such a financial mess and instead of pointing that out and maybe a few suggestions the great zakaria says oh dont worry that we are skrood just remember that the great boogeyman china is skrood too because we owe it money and it has to lend us money of it will destroy itself. Are you kidding? What is this idiot smoking? It makes me mad when the media tells us to put our heads in the sand and pretend everything is ok. Everything is not ok. People have lost jobs in the thousands, our debt rating has gone down for the first time, social and educational benefits are being cut etc while the big companies are showing record profits and the inept, corrupt and heartless government has totally let the people down. But people dont worry the great seer zakaria says its ok. I for one am not a mindless zombie and will never believe the false propaganda in the media.

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

    If they want to go to war for 900.00 count me in to say F U to the creditors lol.......

    August 15, 2011 at 1:30 am | Reply
  16. Chris

    China seems to be nipping at the hand that feeds. The US pulled China out of the dirt and made it into a prosperous country. Now, as with the South Koreans, the Chinese like to massage their ego's and think their success is home grown. Their self righteous superior race mentality would be comical, if was not so annoying to deal with. I would gladly pay 10-15% more for any product made in North America, and I'm sure many more people feel the same. I'm sure China has made it clear that if the US starts pulling jobs out of China, China will expect it's debt paid in full.

    August 15, 2011 at 1:30 am | Reply
    • That'snotTrue:[

      The hands that feeds...you do realize that all countries go after their own national interests right? The US's plan in China just backfired and blew up in its face. If you think of a civilization ten times older than the US, no wonder the US IS in this mess.
      NO RESPECT!!!

      August 17, 2011 at 12:31 pm | Reply
  17. Miraclerose

    They are already migrating to the United States. I think most are Party loyalist as who else would the Communist Government allow to leave. With continuous threats from China, them building their military, buying up infrastructure and power grids I think our governors are putting us at risk.

    China would never allow the Untied States Government to buy and own their infrastructure, resources, and on their soil. They did allow us to finance their Nuclear plant but they own it we just paid for it.

    August 15, 2011 at 1:30 am | Reply
  18. Schmedley

    Before those Chinese bloggers complain too much, the purchase of US T-Bills is what enabled the Chinese government to devalue its currency and peg the Yuan to the US Dollar. The Yuan should be much higher than it is, but the Chinese government doesn't want that because it will make Chinese goods more expensive.

    So, those Chinese bloggers that are complaining about the dependency on US Treasuries should keep their traps shut because that is what fuels their economy and keeps Chinese workers employed.

    We're joined at the hip whether we like it or not. If the US goes down, we're taking China and the whole rest of the world with us.

    August 15, 2011 at 1:32 am | Reply
  19. JoJoCanuck

    This may be true for the moment. But you also have to think lawn term. currently China has an export market, but they are trying very hard to beef up their middle class for one reason only. So all these billion of people will buy things. And once we have billions of chinese all buying up chinese products at their chinese version of walmart, the american market wont seem that important any more. In fact the American market might become more of a hinderence to Chinese stability as there are only so many products that the Chinese can make, and if they are all busy buying their own products, we might not find out shelves at walmart stocked as fully or as cheaply as we are used to. Then America will be truely screwed as the Chinese will be looking to offload our debt and sever trading ties as quickly as possible.

    August 15, 2011 at 1:35 am | Reply
  20. MeChineseMePlayJoke

    The Chinese government and ALL information out of it are a joke. They are begin laughed at by anyone who really knows what is going on. There lies will come back to haunt them.

    August 15, 2011 at 1:36 am | Reply
  21. Carlos Marin

    You didn't do the math correctly. The correct figure is $856.48 USD per second.

    August 15, 2011 at 1:40 am | Reply
  22. Thomas Shafovaloff

    Well, none of what you said prevents China from "hedging" the riisk associatied with owning 1.4 trillion in US bonds and I do expent Russia would join them in making the effort especially wretching – the two are trying to establish a currency to take the place of the dollar.
    So, don't tell me what I already know, that is easy. What isn't easy is anticipating a sudden establishment of currency replacing the dollar after Russia and China have divested themselves of dollars by making the "holding" of a portion of their bond investment a condition of their doing business in places like Australia, Africa and South America!!!!!!!!!!!! And, show me a "patriaotic" hedge fund manager who wouldn't take a part even if were 'poisonous right at home.[Particularly after S&P let their brothers know about the downgrade so they could short Wall Street on the backs of the small investor.
    Thomas E. Shafovaloff
    Thomas E. Shafovaloff

    August 15, 2011 at 1:43 am | Reply
  23. Across12

    I would like you all to mark my words. We are not going to pay back any debt, in other words all the Treasury securities China bought from us are just piece of paper without value. That was the strategy pushed by the American Government to get our dollar back for worthless printed paper and keep doing it till the bubble burst because it's not going to last forever this one. When China eventually will stop buying from us the T's, guess what, WW3 starts off, and who is going to be responsible for starting it that's to complicated to put it down here. Anyway, as tragic as it sounds WW3 is a necessity for everybody because we just reached 7 billion and if it goes like that in 2050 we'll be around 20 billion earth population but obviously we won't get to that because it would be more tragic than the war itself. I'm forecasting the war starting around 2015 and it's going to make us in half which is not bad considering the resources left by now. It's just a necessity and it's going to happen.

    August 15, 2011 at 1:43 am | Reply
    • Andy

      Kill half of human population = good.

      I don't see that as being a positive. But than again I'm not psycho.

      August 15, 2011 at 2:00 am | Reply
  24. cs3yb2i

    Simple, from chinese viewpoint, "made in china" is cheap if sold in china, say just 1.00 chinese yuan, it is expensive if sold in US, say 2.00 USA dollar (Americans think it is cheap). The chinese company earn 2.00 USA dollar and sell it to chinese central bank at high exchange rate, say, USA dollar/chinese yuan=6.5. So what chinese company earns in terms of chinese yuan ? It is 2*6.5=13.00 which is 13 times higher than that sold in china. So it benefits to chinese company and people. As for central banks, it do not matter, as it can print money as it wishes.

    August 15, 2011 at 1:45 am | Reply
  25. Miraclerose

    From a Report in 2008 Regarding China Investment Corporation to the government
    "At the same time, China has also been providing reassuring statements about the
    types of investments the CIC would not be making. Chinese officials reportedly told
    German Chancellor Angela Merkel during her visit to China in August 2007 that the
    future CIC “had no intention of buying strategic stakes in big western companies.”61
    CIC Chairman Lou has indicated that the CIC will not invest in infrastructure.62
    China’s Vice Minister of Finance Li Yong also dismissed “rumors that China would
    try to buy out European and American companies in large numbers.”63 Vice Minister
    Li has stated that the CIC would not buy into overseas airlines, telecommunications
    or oil companies.64 An unnamed contact at CIC indicated that the SWF also will not
    make investments in foreign technology companies as a means of obtaining advanced
    technology, pointing out, “That’s political, and we don’t do that.”

    The following link is to a map to look at how much is bought up in your state. They are buying the very things they told Merkel they would not.

    http://rhgroup.net/china-investment-monitor/

    August 15, 2011 at 1:46 am | Reply
  26. Mike Smith

    Chinese Communist Party brutality

    http://www.youtube.com/watch?v=zbDSOmTWU7U

    August 15, 2011 at 1:48 am | Reply
    • jojo

      just jeaous of a country doing well - racist Whtes don't like to see non-whites do well.

      August 15, 2011 at 4:38 am | Reply
  27. yazwuz8

    Fareed is very good, no question. Bottom line here is a liitle of "love/hate" relationship. We really love to hate each other thru media BS. But we love the bottom line from cheap labor. The chinese are passionately in love with capitalism which is what America is, good bad but the love of money and attaining it is freedom and yes happiness. You don't need to read Chinese to know this.

    August 15, 2011 at 1:49 am | Reply
  28. cs3yb2i

    BTW, this reporter is a politician. The Americans are businessman by nature. The chinese are very aware of that.

    August 15, 2011 at 1:49 am | Reply
  29. Mike Smith

    Chinese Communist Party brutality

    http://www.youtube.com/watch?v=UWLvrErGKRY

    August 15, 2011 at 1:49 am | Reply
  30. Del

    China and other countries dont want us to fail because we make them rich . We raised millions for other countries in there time of crisis why cant we do it for us. Republicans Dem's fox msnbc cnn and every other channel should host the american buy back get all the stars to do free concerts all over America and we buy our bonds back from China . I DONT WANT TO HEAR WHAT THE REPUBLICANS DEM'S OR TEA PARTY MIGHT DO IT'S NOT FOR THEM IT'S FOR US

    August 15, 2011 at 1:49 am | Reply
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