China Benefits from Economic Stimulus Bill Created Debt
The $787 billion Economic Stimulus Bill will create about $6,700 per US household of new debt. Who will benefit from this increased debt?
Hopefully the US economy will be strengthened from the increased government spending included in the Economic Stimulus Bill, but it is important to look beyond our borders whenever debt is incurred.
Anyone responsible for their personal finances knows the burden of debt, and world leaders are cautioning Obama on borrowing more money to fund the Economic Stimulus Bill. Italy’s finance minister Giulio Tremont (Italy is one of the most indebted countries in Europe) warned, “If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private.” So what country will benefit from the increase of US debt incurred by the Economic Stimulus Bill?
China is the largest holder of U.S. government debt and actually needs it for investing Chinese surpluses. Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), explains:
Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe-haven. For everyone, including China, it is the only option.
Even the depreciated dollar is appealing to the Chinese, which makes it highly unlikely China would attempt to bankrupt the US by selling off all of its US debt. China has nothing else to invest in, as few other countries have debt markets large enough. Real Clear World explains the economic relationship between China and the US:
Over the past two decades, the United States and China have developed a special relationship based on the safety of U.S. debt. In essence, the United States gives China access to the wealthiest consumer market in the world, which in turn soaks up China’s massive output of consumer goods. This not only provides income for Chinese exporters, but also helps ensure social stability in China by providing employment — which is Beijing’s primary economic policy goal. China in turn invests its large trade surpluses, earned in U.S. dollars, into U.S. Treasury debt (e.g., 30-year bonds or 10-year notes). This allows China to store its earnings in one of the largest and most liquid financial markets in the world, without needing to convert between currencies. Meanwhile, the recycling of surpluses into Treasury instruments helps to bankroll continued U.S. spending. It is vendor financing on a global scale. This relationship has fueled unprecedented booms in both U.S. consumer spending and Chinese industrialization.
It’s no wonder Hillary Clinton’s first trip as Secretary of State is to Asia and not the Middle East (her husband didn’t visit China until his sixth year in office). Bloomberg explains the economic significance of the trip:
This time, as the world is dragged into a recession driven by a credit crisis in the U.S., policy makers point to China’s new clout: an economy now bigger than Germany’s and the largest foreign holder of U.S. Treasury bills, with $682 billion.
The two economies are interdependent as never before: China is the U.S.’s second-largest trading partner, buying $71.5 billion in U.S. exports last year as the U.S. took $337.8 billion in Chinese imports.
Just as we can’t exclude China’s growing population and economy from the climate change equation, we shouldn’t fail to consider China’s role in our economic policies. China is not in the position to help anyone during this economic crisis, other than buying US debt. Bloomberg further explains:
The notion that China could deploy its estimated $1.9 trillion in reserves for domestic stimulus or to rescue world markets is wrong, economists say. With a non-convertible currency, a $266 billion trade surplus with the U.S. last year and a limited and disappointing track record of overseas investments, China has no better option than to buy U.S. debt.
China doesn’t want to become the world’s bank, just the United State’s financier. Let’s hope this gives us power to get China to adopt hard targets on greenhouse-gas reductions.
Image: SmokingPermitted on Flickr under a Creative Commons License
[...] seems unbelievable that after approving a $787 billion Economic Stimulus Package, President Obama could keep his campaign promise to reduce the federal deficit, but that’s [...]