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. Mike Smith

    Chinese Communist Party brutality

    August 15, 2011 at 1:52 am | Reply
  2. ezekiel

    i just hope that the us goes down!!!!!i lived there all my life i,m 40....the US thinks that because they have some weapons they canjust barge in anyones busness,they been doing this for decades,i hope the get what they deserve,and they will,so the world dont become so dependant on them,china should keep their cheap production to themselfs,chinese products are horrible!!!!most countries should self sostain themself

    August 15, 2011 at 1:56 am | Reply
    • Miraclerose

      So where do you live now? I agree we should not be the world police and at the price of the United States Citizens...especially the Senior Citizens who paid into their Social Security Retirement fund all their lives being told it would be there when they retire......but our dishonest politicians took the money and stuck a bunch of IOU's to them.

      August 15, 2011 at 2:17 am | Reply
  3. MACK

    The Chinese are slinging mud? Because they are the paragons of all things right and fair? So how do they explain products such as; drywall, baby formula, pet food, lead in toys, cookware and dinnerware, et al. Oh and what about the out and out thievery regarding intellectual property, trademark and copyright infringements? They also underpay Chinese workers by making the yuan weak by purchasing dollars. Chairman Mao would be appalled by such greed and corruption borne of the capitalist spirit that China now embraces. Hypocrites.

    August 15, 2011 at 2:08 am | Reply
    • Miraclerose

      How do we explain the lack of action and putting restrictions on these type of things. Too much to be inspected then too much being brought in.

      August 15, 2011 at 2:18 am | Reply
  4. MACK

    The biggest export for the U.S. is its own wealth. Go ahead China, do the U.S. a favor and refuse to play the zero-sum game that you are winning. If someone were to make me wealthy, I would be appreciative rather than treat them with scorn, contempt and insult.

    August 15, 2011 at 2:25 am | Reply
    • Damian Palmares

      Exactly....without our help, they would still be an isolated country that would be nowhere near the levels of growth they have today.

      August 15, 2011 at 2:54 am | Reply
      • oh no

        Since when we "help" without USA national interest?

        August 15, 2011 at 10:18 pm |
  5. jack279

    US Treasuries are the safest, and most liquid. China won't do a thing other than continue buying them. If China could hurt the US without hurting themselves, they would've done it already.

    August 15, 2011 at 2:29 am | Reply
  6. Across12

    You can call me a pshyco or whatever you might like to but the truth of the matter is that WW3 is a necessity for mankind, besides all the debts writes off as a result of two birds killed with one stone – debts over and half of the globe population disappear. I know it sounds tragic for most of the people but in the long term is a benefit for both humans and nature. We will keep issuing and sell T-bonds to whoever wants to buy because they will never reach maturity in other words we get the dollar back for worthless printed paper, and when eventually will be no buyers out there we push the button...that's life.

    August 15, 2011 at 2:33 am | Reply
  7. slayerwulfe

    The U.S. pays to China 74 million per day in interest payments, who is the U.S. and were doing them a favor all right. The question is how long are we going to keep doing it. To all that bash China's products and business practices the same thing is happening right here and everywhere else. Just like our gov't can't control everyone theirs can't either and their beginners at the game we've been playing a long time.

    August 15, 2011 at 2:35 am | Reply
  8. FU

    China has to lend the US money so that the US can buy crappy stuff made in China...ah, the circle of life...

    August 15, 2011 at 2:37 am | Reply
    • FedupwithLA

      You are right about that, my friend. Just go to any WalMart and see for yourself. What impact does all this junk have on the environment? As long as it gives the Chinese something to do . . .

      August 15, 2011 at 5:28 am | Reply
  9. Azm Aftab

    I am amazed at some of the comments and at the idiocy of Fareed Zakaria who is even suggesting that US may not be able to pay its debt back and become a defaulter. China my suffer some loss if US may not pay back but it certainly wont spell doom for the Chinese. They would still have rest of the world as a target market, where no one in the world would trust USA again. Even if China suffers a loss of $1.2 trillion, their reserves are more than enough to cope with that loss and all it would do is create a minor deficit, not in their budget, but in their reserves! On the other hand US will be as good as Somalia if it fails or refuses to pay back its debt.
    What amazed me even more was the amount of people who can even entertain the thought of bankruptcy! what has happened to Americans?

    August 15, 2011 at 2:38 am | Reply
    • Damian Palmares

      People are just acting out scenarios. The fact of the matter is we would never default. It wont happen...Taxes would be raised to 50% and all discretionary spending would be cut before that would happen and none of that is going to happen either. Once the housing market comes back, we'll get back on track fully and our GOV will, at some point, address some of the long term debt. They really need to stay focused on getting the economy growing again right NOW though. That should be their main priority.

      August 15, 2011 at 2:50 am | Reply
    • MACK

      Did you even read the article, or did you immediately jump to your false conclusion? He did not evenly remotely suggest that the U.S. "may not be able to pay its debt back and become a defaulter." He pretty much hit the nail on the head of this issue. He must be some kind of master carpenter. He correctly pointed out that China does not buy U.S. treasuries simply because they are nice guys. China needs dollars to keep their cheap exporting/wealth importing machine running smoothly. And U.S. debt/dollars are the most viable and safest instrument to do that. China loans the U.S. money, which makes the yuan cheap, which makes Chinese goods cheap, which the U.S. then buys. So at the end of the day China is the "company store" and the U.S. is "another day older and deeper in debt".
      So is the U.S. really better off owing its soul to China? I think not.

      August 15, 2011 at 3:47 am | Reply
  10. dave1999

    Sigh....China should be more friendly towards the U.S.

    But then again,it is what the stupid Communist government is all about,Brain Dead!!!Last time,there was this Soviet Union n Eastern Europe,now communist China....Stupid Communism....

    August 15, 2011 at 2:54 am | Reply
  11. sapsxy

    I dont understand why Chinese authorities aren't spending money on most needed projects in their country,like :
    1) water problems : they dont have vast lakes of clean water,maybe they should remove all those deserts and turn that space into lakes to store "flood water".2) They could use that buildup reserves to update their coal powered power plants with the latest in cool technology. 3) They could bulldoze and reshape mountains and lands in their country that have given them problems of landslide and fooding; also they need more flat lands to feed its population since most flat lands were "taken" up to build new cities. 4) Make an attempt to make solar panel and alternative engergy systems for cheaper for the rest of the world 5) They could build new great wall of china surrounding its nations borders.6) They could house millions of their people into those empty cities,since its empty anyways,and workout some arrangement way for its people to pay the mortgage.7) They could tackle many of their hazard enviromental problems 8) Chinese could decide to build space city and take the lead in space exploration and moon and mars missions. So,there are more than dozen ways the Chinese authorities can make use of the excess capital they been piling up.And all these are long term employment projects.

    August 15, 2011 at 2:57 am | Reply
  12. Karanveer Singh Aulakh

    Dear Mr Zakaria,
    I am a regular viewer of "Fareed Zakaria GPS" this Sunday i saw your News Show and I agree with you on the China issue the Chinese are thinking beyond their limits i think they need a break. They are doing NO favor to anyone by buying someones debt. US should not worry about China or anything else,US must cut down aide to Pakistan. US must slowly withdraw from Afghanistan,Iraq when situations Improve. Slow withdrawal from Iraq Afghanistan is the best way to bring back the Old America. The Focus of government should be on spending money on infrastructure build roads,bridges. Etc
    Karanveer S Aulakh, Chandigarh India

    August 15, 2011 at 2:59 am | Reply
    • Azm Aftab

      US gives AID to not just pakistan but many other countries to name a few, Israel, INDIA, Indonesia, Kenya, bolivia...etc Here, , have a read for your self before embarrassing yourself further by being an Anti-Pakistani moron.

      August 15, 2011 at 3:16 am | Reply
      • hashki

        dont mention india blogger just pay debts and stop those excuses the issue here is that whoever has a debt is broke. .

        August 15, 2011 at 3:38 am |
      • Mac

        There is no such thing as Aid, the US paid to use Pakistani territory, equipments and infrastructure to invade Afghanistan and uses Pakistan's military to fight US wars. Pakistan has lost more than 25,000 soldiers and over 50,000 civilians fighting for America, that is more than all other involved nations combined.. No amount of aid can ever repay such a huge loss of life by the Pakistani people. Also Pakistan never asked for the aid, it was Bush/Cheney cronies who went to that country bearing huge gifts and asked for help to fight the Taliban.

        August 15, 2011 at 5:36 am |
      • @Mac @Azm

        So, why exactly did Pak choose to nurture the Taliban? When you support all those terrorists, don't you know you are playing with SH1T?
        You will blame the US for all your problems. Hey, do remember that the Saudis funded your ISI to nurture the taliban. And yeah, you guys enjoying playing with sh1t. You even enjoyed the stink from a distance.

        Now that it has hit the fan, you are playing the victim.

        August 15, 2011 at 10:50 pm |
  13. MM

    LOL, very bad analysis, this article looks like that US and writer is begging china to help

    August 15, 2011 at 3:12 am | Reply
  14. McFancy

    Seriously? Fareed Zakaria???
    Oh well,whatever helps you sleep at night!

    August 15, 2011 at 3:12 am | Reply
  15. Damian Palmares


    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


    That would be a good strategy for them and I'm sure they are trying to do just that, but it's a lot harder than you think. They're just starting to build a middle class, we've had one for a long time. They still have so many people at the poverty level in terms of purchasing power, it will take them decades to reach that point. I said this before but their nation's purchasing parity power is $7900 per year. Ours is $47,500. Iran has more PPP than China and you don't see too many Iranians buying flat screen TV's and supporting their economy's growth. It will be a long time before they ever reach the point you're speaking of.

    August 15, 2011 at 3:14 am | Reply
    • Damian Palmares

      And one more thing to jojo canuck...We don't buy too many things that were designed and manufactured solely from China, as the only thing they really know how to do at this point is copy or steal technology from us. Manufactured in China, but designed from our companies here in the US. When they do get to that point, we should also be miles from where we are today.

      August 15, 2011 at 3:26 am | Reply
  16. Clive

    I think Fareed Zakaria is an excellent commentator and this is a very good piece. The only doubt I have about it is the euro. I am British and I don't like the euro for political reasons – but for those same political reasons the Chinese do like it. They also have big enough pull to hold it up. Through all of its trials and tribulations the euro has remained strong. See an interview in today's 'Der Spiegel' in which it is suggested to George Soros there is a 'mystery buyer' of euros. If there are ever Eurobonds – and there will have to be if the euro is to survive but the Germans hate it so they are delaying – but if there ever are Eurobonds the Chines will jump into them with both feet. I agree that that does not mean they will sell T-bills but it will mean that maybe the T-party (see what I did there) have a point and even in the medium the US debt is not sustainable.

    August 15, 2011 at 3:21 am | Reply
  17. irwin

    Fareed is mistaken

    $ is sinkin g rapidly against a basket of major currencies. China could move their money in commodities, and certainly can buy assets all over the world, specifically in Africa and Europe. Afirca for resources.

    It does make sense for them to move away from $, as a matter of facts, once their economy is strong enough, they will move away from $, simply because they intend to diversify from export to some sort of domestic consumption.

    The $ credibilty as a reserve currency is in question, and the world economies, will dump the $, and move to SDR, and china yuan and the other bric should be included, and guess what that will be end of USA.

    For 4 -5 decades USA been manipulating $, because it's the main reserve currency, and most commodoties are priced in $. This will not be the case in 20 years, when USA will not longer be number 1

    August 15, 2011 at 3:28 am | Reply
    • Damian Palmares

      Keep dreaming.

      August 15, 2011 at 3:32 am | Reply
      • irwin

        Exactly what do you think Quantative easing do? QE does exactly what the chinese too, but a larger scale. Devaluating $.=, to make american goods cheaper, but this time. Commodities are rising, e.g crude, as declining $ does not mean commodities becomes cheaper for other stronger.

        This is backfiring for FED, as no longer people will accept $ manipulation. Crude goes up, america will not succeed, simple correlation. Why is it there will be no QE3, as crude will rocket and USA will go back to recession

        August 15, 2011 at 4:26 am |
    • McFancy

      Agree with irwin

      @Damian Palmares, you better wake up from your dream. Do you even realize whats happening and how ridiculous you sound?

      August 15, 2011 at 3:52 am | Reply
      • Damian Palmares

        I fully understand what's going on.

        August 15, 2011 at 4:11 am |
      • Damian Palmares

        Just because you doubt that the US can't recover from this, doesn't mean that I don't. I believe we will and that's my opinion. The reason they wont pull away from the $ is because they have to keep their yuan down. When they are able to purchase domestically and keep growth without exporting, then I could see them moving away from the dollar. but that's not going to happen for a long time. They don't have the domestic purchasing power to do that yet and it will be a long time before they do. So they will keep buying T-Bills in order to peg the USD and keep their Yuan from appreciating so they can keep profiting and building ghost cities and such

        August 15, 2011 at 4:17 am |
  18. hashki

    Am really happy that soon this crap of America being the sole superpower will be over, kudos china. How do you call yourself a super power with a debt of 14.3 trillion plus debt. The clock is ticking very fast. Its good that the entire Africa is the major consumer of china's products and now nations like s.sudan are learning Chinese as their National language. America your time is up. 883 dollars debt per second that is a big joke and it really makes me happy seeing america going down so fast.

    August 15, 2011 at 3:30 am | Reply
    • oh no

      At lease China will pay. If China don't, we can count on big brother mafia USA to help!

      August 15, 2011 at 9:49 pm | Reply
  19. venu

    If chaina is trapped in US, they can look for inda for investments

    August 15, 2011 at 3:39 am | Reply
  20. RyanB

    Ron Paul has given you the right answer: We have overextended the USA in needless wars, many of them
    aimed at depriving China of resources!

    Curb millitary spending and start exploring US based oil – and mind our own business is the answer.
    To all you wishful thinkers mentioning "War" against China – we can't even drop Colonell Gadaffi on our
    own, China is not a nation to be messed with!

    August 15, 2011 at 3:59 am | Reply
    • Damian Palmares

      Can't drop Gadaffi...what a joke. We haven't even tried.

      August 15, 2011 at 4:08 am | Reply
    • Damian Palmares

      I agree with increased exploration of US based oil though. Maybe the Bakken oil shale will pan out.

      August 15, 2011 at 4:10 am | Reply
    • Fedup

      In the world community, only Americans talking about going to war with other countries. You are so proud of being superpower and beat up the weaks. Look at the countries you invaded, Iraq, Afghanistan, Libya. I am impressed.

      August 15, 2011 at 4:37 am | Reply
  21. rinosaur

    China can't beat the US in a war, so they won't start one one. The United States is going to be in trouble soon. The economy has been mostly stagnant or worse for a decade. We have simultaneously been fighting outrageously expensive wars all across the middle east and Asia. The Republican party continues to stunt social and environmental progress. education and infrastructure are in a slow sag while the military's budget continues to grow (not that we have anyone to use it against). Then of course, is the looming budget crisis, which will eventually force us to choose between a superpower's military and influence or a high standard of living.

    I'm not a "chinese propagandaist", but the truth is, the US can no longer have it all. The rest of the world is getting it's economy in gear and is finally escaping a half century of imperialism by Russia and the US.

    We will either scale down and relinquish our military strength, or become a bankrupt and crumbling country, surrounded by a gleaming military but nothing else. Much like the Soviet Union not so long ago.

    August 15, 2011 at 4:13 am | Reply
    • USA

      Chinese products are like Chinese food, after an hour, you are hungry again.

      August 15, 2011 at 9:42 pm | Reply
  22. Klaus

    "We're probably doing them a favor". So the debtor is doing the creditor a favor.

    Well, I know, that's Zakaria's perspective on economics. I still remember his articles about economics in Newsweek. This one sounds rather like Fox news.

    In fact the U.S. depend on China, as well as China still depends on the U.S. That was true in the past, and it's true until now. But things are changing right now:

    1st: China has already started diversifying its investments (e.g. by buying shares of very large and reliable companies, Munich Re being only one example). and
    2nd China will reduce it's dependency on exports. It has already started to prepare for this fundamental change.

    And yes, that means that China will slow down its purchases of American debt in the very near future. And yes, that means that the value of the U.S. Social Security trusts' and pension funds' assets will decrease significantly. And it will change the balances in the global economy slowly, gradually. Provided that there is no major crisis in the meantime (a significant contraction would hurt the U.S. as well as China).

    I still remember Zakaria's articles and comments about the financial crisis in Newsweek in 2007/2008. I remember it very well! It has all been proven wrong, and even absurd.

    August 15, 2011 at 4:22 am | Reply
    • USA

      Well said! The question we need to ask: What have we done to turn the economy around? Are we going to keep "doing the Chinese a big favor" as Fareed put it?

      August 15, 2011 at 9:40 pm | Reply
  23. cosmosmusty


    August 15, 2011 at 4:24 am | Reply
  24. Interman

    Dear Fareed,
    I want to do you some favor... please lend me some money so I could be trapped into your cycle...

    August 15, 2011 at 4:27 am | Reply
  25. Ron in Vietnam

    I may be wrong but my excel workbook calculates 74 million divided by 24 hours divided by 60 minutes divided by 60 seconds to be $856/second, not 833/second. A minor difference to be sure, but.......

    August 15, 2011 at 4:28 am | Reply
  26. irwin

    China problem is this, they are scared of Yuan, as matter of facts they can Yuan float, and they will become super power faster. By PPP, china is already richest already.

    August 15, 2011 at 4:28 am | Reply
  27. 2


    August 15, 2011 at 4:32 am | Reply
    • TheBrow

      American food the worst in the world ? ARE YOU MAD ? I lived in China for 6 years and got sick and stopped eating your msg stir fries ! Your food is vulgar ! American food can be unhealthy like yours, but it tastes GREAT ! Btw, whenever I go to KFC and McDons they're packed with chinks, HOW COME ????

      August 15, 2011 at 5:11 am | Reply
      • 2


        August 15, 2011 at 5:20 am |
      • 2

        "chinks"? wo zhong yu zhi dao wei shen me ni jue de zhong guo cai bu hao chi le ,yin wei ni de zui hen chou,bu hui hao hao shuo hua ."

        August 15, 2011 at 5:33 am |
      • 2


        August 15, 2011 at 5:53 am |
    • FedupwithLA

      That's easy for you to write . . .

      August 15, 2011 at 5:30 am | Reply
      • 2


        August 15, 2011 at 5:47 am |
    • David of The Chicago Tribe

      Thanks for the reply! My favorite part was this "界的主宰". I think those are pretty pictures!

      August 15, 2011 at 5:50 am | Reply
      • 2


        August 15, 2011 at 5:58 am |
  28. 2


    August 15, 2011 at 4:35 am | Reply
    • Damian Palmares


      August 15, 2011 at 4:52 am | Reply
      • TheBrow

        why can't you guys write in pinyin ??? btw, are they selling apartments in Tianjin Ecocity yet ? i really wanna buy one !

        August 15, 2011 at 5:02 am |
      • 2


        August 15, 2011 at 5:06 am |
      • 2


        August 15, 2011 at 5:15 am |
      • 2


        August 15, 2011 at 5:28 am |
      • 2+2

        您太认真了,并不是每个美国人都是这样看中国人的;同样, 并不是每个中国人都


        August 15, 2011 at 9:32 pm |
    • David of The Chicago Tribe

      Translation – Chicken Fried Rice: Small $2.99 / Large $3.99. Beef Fried Rice: Small $2.29 / Large $3.79. Egg Roll: (3) $1.99 / (5) $2.49.

      August 15, 2011 at 5:54 am | Reply
  29. NewGame

    Farid failed to test a change of paradigm. How about a new possibility to invest? A new country where it becomes safe to invest? a new way of investing safely?

    Yes, this will unlikely not happen without intervention but what can't be done with 4 trillions dollars?

    August 15, 2011 at 4:48 am | Reply
    • TheBrow

      good question, simple answer. Invest in Brazil ! Plenty of oil, iron ore, fact, the only country that can saciate chink voracity is Brazil !

      August 15, 2011 at 4:58 am | Reply
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