24
Jan-2011

Poor Journalism & American Debt: Will China Call in Debt Early?

I live in China. I’m an American. You’d be surprised at the number one question people ask me from back home. Simply put, they ask why China owns America’s debt, when they will call it in, and why the Chinese are buying up property in the USA. They are fearful of what China will do, and frankly they are angry that a foreign entity owns US debt. I can empathize with these fears, but the reality of the situation is that the US is in a decent stance and the issue of who owns its debt is minor compared to answer the question of why we raked up such a debt in the first place.

Although we don’t usually get into politics at ATC, I feel inclined to answer the most common question we get in a public way.

Of the nearly $14 trillion the US has in debt, China owns roughly 7%. This is not a massive amount when held in light of the grand total, but it does exceed some $900 billion USD. China could, hypothetically, call in this debt and cause massive trauma to the US economy. Not so much because of what the amount would mean to the government coffers, but for the effect it would have on the stock market. The ultimate question is whether China will randomly call in this debt. The answer (in my opinion) is no.

Leading Foreign Holders of US Treasury Securities (July 2010)
Nation/Territory billions of dollars (est.) percentage
People’s Republic of China (mainland) 846.7 20.8
Japan 821.0 20.2
United Kingdom 374.3 9.2
Oil exporters1 223.8 5.5
Caribbean Banking Centers2 150.7 3.7
Brazil 162.2 4.0
Hong Kong (Special Administrative Region) 135.2 3.3
Russia 130.9 3.2
Republic of China (Taiwan) 130.5 3.2
Grand Total 4065.8 100

They wont call it in because the Chinese economy is balanced precariously against the US economy. Should they call in the debt and the US economy start to collapse (or even suffer a recession of any severity) the Chinese economy would suffer because fewer Chinese goods would be purchased in the US (not out of principle, but because consumer spending would decrease amid depression fears). Looking at China’s trade partners  (source:chart below) in recent years shows how dependent China is on the USA for trade. A suffering US economy does not benefit the Chinese economy. It is in their best interest to help rather than hurt, at least at present.

Table 7: China’s Top Trade Partners 2009 ($ billion)
Source: PRC General Administration of Customs, China’s Customs Statistics
Rank Country/region Volume % change over 2008
1 United States 298.3 -10.6
2 Japan 228.9 -14.2
3 Hong Kong 174.9 -14.1
4 South Korea 156.2 -16.0
5 Taiwan 106.2 -17.8
6 Germany 105.7 -8.1
7 Australia 60.1 0.7
8 Malaysia 52.0 -3.0
9 Singapore 47.9 -8.8
10 India 43.4 -16.3

The average Chinese perspective on this is contradictory to what many in the USA assume. While the Chinese are holding the debt, the US has already spent that money on tangible items. For example, the US (hypothetically) used that money to build new jets or expand defenses. Meanwhile, the Chinese have nothing to show for that money. They see the US as benefiting by taking the loan because they increased their worth in a tangible manner while the Chinese only increased their bargaining power by $900 billion USD. Since the two economies are dependent on each other this bargaining power is diminished because no real political threat has weight against the economy and the US tangible military is still formidable while the Chinese military continues to expand. Strategically, its unsure who comes out ahead in this deal. This is the opinion I hear time and again from Chinese locals in Shanghai and Beijing.

Finally, China would not have bought the debt if they thought it was a bad investment. Christina Larson, of the New America Foundation, told the associated press: “China needs a place to park its capital and there’s no place that’s as stable, easy to purchase and feel safe in as the United States.” That shows a certain confidence in the US economy. The US dollar is still used internationally and as such remains an important global asset. Buying the debt now means interest payments to the Chinese government from what they perceive to be an extremely wealthy country, despite the debt clock.

In short, the real problem with the debt isn’t who owns it but why it exists at all and how to get rid of it. Instead of the media raising fears about China’s intentions (as in image, left) they should start asking politicians what they plan to do about decreasing our debt. Running stories on the Chinese intent seems like poor journalism when you look at the actual numbers, and it is probably aimed at capitalizing on American fears to sell more papers or increase viewership and make more ad revenue. Its hard to answer the questions of how we are going to get out of debt and how to set up our system so as not to fall back into debt again. Then we won’t be selling $900 billion to any entity, foreign or domestic. This is what the journalist should focus on. Meanwhile, you can stop asking when the Chinese are going to call in the debt and what that will mean to the economy, it isn’t likely to happen.

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  • Mike says:

    As Thomas Jefferson said, “Our liberty depends on the freedom of the press, and that cannot be limited without being lost.” The press existing as a check and balance system for the government ended back in the 1930’s or before. I wish they would do their job for once. Instead of trying to sensationalize a boy who fell in a well or the next American Idol, I wish they would ask the right questions instead of running a witch hunt all the time.

    Maybe we will hear a plan for how we are going to dig ourselves out of this debt in the State of the Union address…but probably not.

  • Sol says:

    China also fears the depreciation of US dollars, or the appreciation of Chinese Yuan. Because that would mean when China calls the debt, it will get less than how much it lent to the US in real value.

    If America never started any war within the past 2 decades, your economy might be in a better shape now. It has been estimated that America would never, ever return to surplus.

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