China & USA debt
This week on Facebook: Posting an article on ‘Xi Jinping’s Vision for Global Governance by Kevin Rudd’, prompted a colleague in the USA to remark that perhaps China was not as financially stable as was assumed and that the tariffs introduced by President Trump are to China’s disadvantage. Another colleague in the USA probably shares that view and would add to it the financial, military and political superiority that is assumed by the USA. Yet it the Western World’s hunger for a continuance of their debt based economic growth that led to the post WWII hegemony of the USA is now being challenged by China.
I did think of giving this page the title ‘Is US Debt Fuelling China’s Growth’ and given the video below this may be true. The reality is more complex than that¹, for a start, the rising interests rates challenge China’s growth model and while the balance of trade deficit that exists between the US and China is certainly a contributory factor, China has a global trade imbalance. Perhaps what China is succeeding in doing is to hoist the US onto its own petard in a trade battle that China is playing to win² more than a temporary political advantage.
1. A Guide to the Giant Foreign Buyers of U.S. Debt: Have foreigners ever owned this much U.S. debt? No. Nor has the U.S. ever owed so much. Foreign investors hold $6.35 trillion in U.S. government debt, more than twice as much as in 2008. (The share of debt owned by foreigners fell in that time period, to 44 percent from 56 percent, primarily because the U.S. Federal Reserve was buying so much itself.) China is the largest holder of Treasuries at the moment, followed by Japan, and between them they account for more than $2 trillion of U.S. securities.
2. China’s $1 trillion-plus U.S. debt holdings would be double-edged sword in trade war: China is the biggest holder of U.S. debt — $1.17 trillion as of January — built up over decades as leaders looked to diversify their bulging surpluses safely as the economy expanded at breakneck speed. Those investments help grease the cogs of the titanic U.S. economy, paying for crucial services and infrastructure as well as Trump’s $1.5 trillion tax cuts passed in December. With billions coming in, only U.S. financial markets are deep and liquid enough for Beijing to invest in, while the purchases also allow China to control the value of its renminbi currency.
3. China overloading poor nations with debt, top U.S. official says: Lawmakers in the United States are advancing a new law – the BUILD Act – through Congress that Washburne says should bolster private U.S. investment in developing nations by doubling OPIC’s access to U.S. Treasury credit to $60 billion. About a quarter of the active portfolio of OPIC, a government agency that helps U.S. businesses invest in emerging markets, is currently focused on Africa and it typically invests around $1 billion annually on the continent.
4. Trade War Or Not, Beijing Will Continue Buying U.S. Treasuries — It Has No Choice: What would happen if China did stop buying U.S. Treasuries — or even worse, began selling them? Two things. First, U.S. long-term rates would spike, at least temporarily, crushing world financial markets, and especially those of emerging markets. This is because a spike would reverse the dollar carry trade—the capital flows from the U.S. where interest rates are low to those of emerging markets where interest rates are high, including China. Second, the yuan would appreciate against the dollar, hurting China’s exports, economic growth, and employment. So it appears that scaling back on purchasing U.S. Treasuries — or even selling them off — isn’t an effective policy to get even with the U.S. in case of a trade war.
5. China Owns US Debt, but How Much? It seems like every American politician and talking head is concerned by the huge amounts of debt that the U.S. government owes Chinese lenders. The Chinese do own a lot of U.S. debt — $1.168 trillion as of January 2018.
Referenced Articles & Books:
- A text subscript above and preceding the title here, refers to a book or pdf (usually free), or simply a url that may sometimes link to a download that is also usually free.
- A superscript on the brackets following the title here refers the articles (1-5) that it can be found in.
- Occasionally an especially long url read is included below where the text superscript is preceded by an asterisk.
- Sometimes a link to JSTOR is used, this lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.
*¹Is it a risk for America that China holds over $1 trillion in U.S. debt (url)? Many worry that China’s ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations. The purchasing of sovereign debt by foreign countries is a normal transaction that helps maintain openness in the global economy. Consequently, China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries.
²How Beijing Defied American Expectations (url): Ever since, the assumption that deepening commercial, diplomatic, and cultural ties would transform China’s internal development and external behaviour has been a bedrock of US strategy. Even those in US policy circles who were skeptical of China’s intentions still shared the underlying belief that US power and hegemony could readily mould China to the United States’ liking.
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