Recently, Reuters reported that China owns a staggering $1.16 trillion of US Treasury (UST) securities. This revelation was significantly larger than previously known. By far, China is the US's largest creditor. What does this mean for China, the US, and the fragile world economic recovery?
For starters, there is no doubt China has a greater ability to affect US capital markets than ever before. When China reduces its holdings of UST securities, by either not buying more when those held mature or by selling UST securities on world capital markets, there is considerable concern all over the world. For example, China reduced its UST holdings by $34.2 billion in December 2009. The Chinese lack of demand for UST securities at that time undoubtedly depressed UST prices. As a result, during the following three to four months, yields on nearly all UST bonds were noticeably higher.
Many Americans may think the Chinese can use their position as the US's largest creditor to gain an upper hand economically or unduly influence other types of policy in negative ways. It is possible that the steady purchases of UST securities in the past have contributed to a stronger dollar relative to the Chinese RMB. This is because China converts its currency into dollars in order to purchase UST securities. But, a weak RMB has significant advantages for the US, despite the many job and trade disadvantages argued by many US "China" critics. (See my October 2, 2010 China.Org editorial.)
In my opinion, it is very unlikely the Chinese have or will ever have a nefarious plan to destabilize the US economy or to undermine our current recovery; either on purpose or by accident. It is simply not in China's best interest to do so. As the Chinese work hard to stimulate their domestic demand, they need the US to continue to buy their goods and to sell them high end products in order to provide full employment and an ever improving standard of living for their citizens. This is critical to political stability within China – something that is of vital concern to both nations.
Furthermore, the substantial and disproportional holdings of UST securities by China, is a strong vote of confidence in the American system. This investment signals a Chinese belief the political, economic and societal infrastructure of the US will remain intact for the foreseeable future. This belief is one significant justification for a rational Chinese investment in UST securities. Consequently, Americans should not be surprised by the Chinese stated desire for the US dollar to remain strong. The future purchasing power of the Sino UST portfolio is at stake.
The US needs China to continue to extend credit until America can systematically and steadily curb its unsustainable consumption and bring all of its spending habits (including its government's) under control. The key to this is to do it slowly so as not to shock the US economic system.
As our nations move forward, it is more and more evident we are inevitably dependent on the economic soundness of the other in order to make economic and social progress of our own. I believe knowledgeable policy makers in both countries recognize this fact. Together, we have entered into an era of mutually assured economic destruction or into an era of the more we cooperate, the better off both countries will be. Americans and Chinese should appreciate our complex and mutually beneficial economic relationship, not fear it.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/node_7078635.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.