As the global economy continues to weaken, more economists have been focusing on China due to its dominant position in global trade. Indeed, the U.S.-China trade relationship has become particularly significant over the past decade. Chinese imports are found on nearly every shelf of every store in the U.S.
As you can imagine, the availability of these inexpensive imported goods from China feeds the insatiable appetite of U.S. consumers. Accordingly, because consumer spending is responsible for about two-thirds of the U.S. economy, many tend to believe that this trade relationship is a one-way street with China as the victor. However, China remains much more dependent on the U.S. than many realize.
Ever since entering the World Trade Organization in 2001, China has risen to become the global leader in export trade. But its economic dominance has not been the result of special skills held by Chinese laborers.
Trade liberalization and other economic changes initiated during the 1980s enabled China to organize and leverage its labor force. By the 1990s, radical shifts in global trade policy would soon embolden China as a vital member of the global economy.
China’s rapid ascent as an economic powerhouse has also been the result of numerous government subsidies which have provided domestic firms with significant advantages over their foreign rivals. As well, China has permitted slave labor conditions which have further exploited differences in trade policy with its trading partners.
Finally, reckless consumerism in the U.S. has fueled the demand required to keep much of the Chinese export engine running. This latter dynamic has also contributed to the loss of millions of American jobs. Wall Street analysts and economists working at the “most prestigious” universities have labeled the trend of millions lost jobs in the U.S. as “creative destruction” in order to mask the malignant nature of U.S. trade policy.
Irrespective of the collateral damage done to the U.S. economy, the U.S.-China trade relationship has enabled China to amass an enormous current account surplus due to its increasingly large trade surplus. This has generated a large pool of cash.
What does China do with all of the cash generated from this trade surplus?
Some of it goes towards its enormous sovereign wealth fund. But the majority of this cash, compliments of U.S. consumers, is held in U.S. Treasury securities. This financial strategy has several advantages. For instance, since China’s trade surplus with the U.S. is already in dollars, by investing in U.S. Treasury securities China can receive interest payments compliments of Uncle Sam. In this manner, China can avoid the various risks associated with foreign currency transactions.
Consequently, many critics have likened China’s ownership of U.S. Treasuries to America being “owned by China.” The argument backing this claim is that because China owns so much U.S. debt, it could dump these Treasury securities at any time, thereby causing interest rates in the U.S. to soar.
However, this scenario is highly unlikely for a variety of reasons. First, China would have to own a very large percentage of U.S. Treasuries. Next, China would also have to sell these securities over a short time frame. Finally, there would need to be a very low demand for these securities once China dumped them into the bond market.
Here, I am going to show that China does not hold as much U.S. debt as most people think. Next, I’m going to demonstrate that China would be extremely unlikely to dump (that is, sell the majority of its position over a short time period) the U.S. Treasury securities that it owns.
Finally, I am going to make the argument that even if China did hold a sufficiently large amount of U.S. Treasury securities and planned to dump them, at least two prominent nations would step in to buy as much as would be required to stabilize the U.S. government bond market and thus U.S. interest rates.
How Much U.S. Debt Does China Own?
Before we can determine the amount of influence China holds over the U.S. economy, we need to determine the percentage of U.S. Treasury securities owned by China.
The total outstanding national debt of the U.S. is nearly $16.5 trillion. Of this amount, foreign nations own $5.43 trillion, or about one-third of the total. The remaining two-thirds are owned domestically in the form of pension plans, endowments, financial firms, insurance companies and individuals.
Okay, so how much U.S. debt does China own?
Of the $5.43 trillion outstanding debt held by foreigners, $1.153 trillion or about 20% is held by China. That’s certainly a sizable amount of foreign debt. But it only represents about 6% of the total U.S. sovereign debt burden; not exactly a huge amount. In fact, I argue it’s not large enough to cause much more than a short-term rise in interest rates if China were to dump its entire holdings.
But let’s assume this amount were significant enough to cause some real damage. After all, we keep hearing how China is selling off U.S. Treasuries, right?
Is China Selling U.S. Treasury Securities?
Over the past few years, many individuals who have been selected by the Western media as “credible experts” have insisted that China is selling U.S. Treasury securities. They have forged this myth into the minds of their audience in order to create panic and fear.
As they issue dire warnings regarding the “imminent complete collapse of the U.S. dollar,” they have even compared the United States to Zimbabwe. After instilling fear and panic into their victims, these charlatans insist that “everyday Joes” trade in their dollar savings accounts for gold, silver and even the euro. Sadly, many Americans have followed this horrendous advice.
This propaganda campaign has been just one aspect of the hyperinflation scenario painted by these charlatans. However, as the data reveals, China is not reducing its holdings of U.S. Treasury securities. Moreover, hyperinflation in the U.S. is virtually impossible so long as the petrodollar exists.
These ridiculous claims and irresponsible recommendations have come from gold and silver manipulators, and foreign currency hacks, or what I consider to be nothing less than con artists. Their only agenda is to artificially pump up the price of gold and silver and build up commissions for precious metals dealers and currency brokers. Their ridiculous sales pitch is broadcast on major televised networks on a daily basis, and often repeated by others on radio shows and blogs. Most people tend to accept ideals that are repeated, especially when the same message comes from a variety of sources.
As they attempt to scare Main Street with exaggerated claims and sensationalism, these snake oil salesmen never bother to mention the fact that currency trading is considered very speculative, and hence very risky. But their objective isn’t to provide prudent, sound advice. The only thing they care about is taking your money. Greed has no conscious.
The problem is that the media has not aired anyone who has truly challenged these ridiculous claims or the men behind them. The reason for this is simple. The media is being bought off by gold dealers and foreign currency firms in the form of advertising revenues. As a result, millions of people stand to get burned all while sending commissions to gold dealers and currency trading firms.
To prove their point, these masters of propaganda have looked at short and insignificant periods of China’s holdings of U.S. Treasuries and have concluded that the Red Dragon is selling its position. Fluctuations in bond positions over a one- or even six-month period do not tell us much because bonds are managed based on several macroeconomic variables. The only way to determine whether China is selling U.S. Treasury securities is to examine the longer-term trend.
In the past I have shown that China is by no means selling U.S. Treasury securities. In fact, if you look at the trend in net holdings over the past few years, China’s share of U.S. Treasury securities has actually soared. For instance, let’s take a look at the period since the November 2008 financial crisis. Gold charlatans continue to insist that China has been selling U.S. Treasury securities over and over since 2009. Is this true? Let’s look at the data from the U.S. Department of Treasury.
In November 2008 when the financial crisis was at its peak, China held approximately $713 billion in U.S. Treasury securities. As of the most recent data through September 2012, China has increased its holdings of U.S. Treasury securities to $1155 representing an increase of about 62%. Furthermore, if we go back to January 2008 ($492 billion), China has actually increased its holdings of U.S. Treasury securities by over 234%.
Previously, I made the claim that China did not own enough U.S. Treasuries to cause much of an impact even if it did decide to dump its entire position into the market. But let’s assume that China accumulates a much larger stockpile of U.S. Treasury securities; say 30% of the total instead of its current 6%. Although I can guarantee you Washington would never let this happen, let’s just assume for argument sake that it does.
What would happen if China was foolish enough to dump these securities into the market? Would there be a sufficient number of buyers to soak up this excessive supply of U.S. Treasuries?
And why do I claim China would be foolish to dump these securities?
I’ll get back to the second question later. Anyone who understands the global banking system will tell you that the U.K. and Japan stand ready to buy up U.S. Treasuries if they were dumped into the market. This is a fact known to every legitimate economist and banking executive in the U.S.
Even Saudi Arabia would step up to the plate and soak up any excess supply of U.S. Treasuries if needed. I’ll get back to Saudi Arabia’s role in a future article.
Why Does China Own U.S. Treasury Securities?
Earlier I claimed that China would be foolish to dump U.S. Treasury securities. Now, I’m going to explain why this is the case. Part of the explanation involves understanding why China owns U.S. Treasury securities to begin with.
There are two basic reasons accounting for China’s ownership of U.S. Treasuries. First, China’s trade surplus with the U.S. has continued to increase over the past several years. Since the trade surplus is denominated in U.S. dollars, it is much easier for China to keep the funds in dollar-denominated assets rather than to risk losses in the currency exchange market. Furthermore, U.S. Treasury securities remain as the safest investments in the world. So China can easily transform its trade surplus into safe securities that pay interest. I mentioned these points earlier.
The second reason why China owns U.S. Treasuries is related to the intentional manipulation of its own currency, the Yuan. China has artificially suppressed the value of the Yuan relative to the dollar for many years now. Thus, it would suffer huge losses if it were to convert its trade surplus dollars into Yuan. Make no mistake. This currency manipulation is essential for China to maintain a significant edge in global export trade.
If in fact the U.S. dollar was not the world’s reserve currency, China might decide to sell its holdings of dollars and dollar-denominated assets due to various macroeconomic risks. But the dollar remains as the safe haven currency for a variety of reasons, although gold charlatans would have you believe otherwise.
Let’s expand this scenario. Even if China owned a large percentage of U.S. debt and decided for some reason to dump these securities, and even if the U.K. and Japan did not step up to the plate to buy them, the Federal Reserve and the Banking Cartel most certainly would.
China’s ownership of U.S. treasuries is mutually beneficial
There are even more benefits that come from China’s support for U.S. Treasury securities. By holding and even buying more U.S. Treasuries, China helps keep interest rates low in the U.S. This in turn keeps the credit flowing to U.S. consumers so they can keep buying Chinese imports. Thus, China’s investment in U.S. Treasury securities is mutually beneficial.
In summary, China owns U.S. Treasury securities because this investment option offers a very safe and convenient way to deal with its trade surplus with the U.S. And its support for U.S. debt also serves to keep interest rates low in the U.S., which keeps the credit flowing to U.S. consumers, who buy Chinese imports.
China relies heavily on Wall Street.
Irrespective of this mutually beneficial financial arrangement, China remains highly dependent on the U.S. for much of its economic growth. Over the past two decades, China’s blistering growth has been fueled by foreign investment, mainly from Wall Street. This relationship was made possible through the gradual privatization of Chinese corporations which began some two decades ago.
Privatization of these formerly state-owned firms has enhanced their competitive position around throughout globe. Once these firms were privatized, they were able to receive foreign investment capital, majority of which has come from Wall Street in some form or another. Thus, without the continued influx of foreign investment capital, China’s economy would come to a halt. In addition, if demand from Chinese imports from the U.S. stopped, China’s economy would crater. From there, Chinese consumers would be required to pick up the slack.
Even though Chinese consumers boast one of the highest savings rates in the world, it would take a great deal of effort by the government to transform the Chinese people into the kind reckless consumers seen in the United States.
In order to understand the propensity of Chinese citizens to save more than they spend, one must understand a bit about Chinese culture. But from a purely economic standpoint, the Chinese people know that their economy is more vulnerable to global shocks than advanced economies. Therefore, they typically save a large portion of their income to protect them from an economic crisis. As well, China does not have an adequate social safety net or retirement system, so savings comprise a good deal of the economic security blanket of the typical Chinese citizen.
So what does all of this mean? In contrast to what you may have heard from the media, the United States has a great deal of economic leverage over China as opposed to the other way around.
What’s the relevance of this? I’ve already mentioned how these misconceptions have been plastered throughout the media by gold and foreign currency charlatans. But others are involved in this game of deception. For instance, talking heads posing as critics of America’s fascist economy state that the U.S. cannot go up against the illegal practices being used by China to gain economic advantages over U.S. firms because China has too much leverage over the U.S. economy.
Of course this is rubbish. The idea is to convince the public that this is true so that they will accept these illegal activities. But why would the U.S. go along with this?
Because the economic dynamics created as a result of these activities benefit corporate America.
How to stop the Hemorrhaging of U.S. Jobs
Currently, the U.S. still holds the upper hand in the U.S.-China economic relationship. But there may come a day when this edge no longer exists. Thus, the U.S. must respond now while it holds a position of dominance.
So what must be done? At the very least, the U.S. needs to engage in protectionism in order to shield itself from unfair trade measures and currency manipulation from China. But this will never happen so long as the U.S. is controlled by a fascist regime. Instead, corporate profits will be placed ahead of domestic jobs. Accordingly, as long as the U.S. continues to embrace its fascist trade policy, there will no real recovery from the current depression for the vast majority of Americans.
Establishment economists insist that protectionism caused the Great Depression, but this is simply not true. They have used protectionism as a scape goat in order to advance their globalization agenda.
In reality, many of the same elements responsible for America’s first Great Depression also led to the current Great Depression. In brief, both depressions resulted from the culmination of Wall Street fraud, lack of regulatory controls, and the knowledge held by the criminals that they would not be held accountable.
In conclusion, China is certainly an important player in the U.S. economy, but the relationship is mutually beneficial. Furthermore, the U.S. holds the upper hand in this relationship due to the power of American consumers, as well as the massive foreign direct investment from Wall Street.
So is there any nation that holds significant influence over the U.S. economy? One need only look to the Middle East and they will find the nuts and bolts of America’s economic engine. It’s commonly referred to as the petrodollar. It is a topic I will discuss in the near future.