March 16, 2009
By Derek Scissors, Ph.D.
trade, human rights, North Korea, naval standoffs…
America and China have plenty to talk about.
Nothing new about that. But in the last six months or so,
whenever these issues come up, someone -- a Chinese official, a
journalist, sometimes even an American official -- will pipe up and
claim the U.S. can't press our interests firmly because "China is
If China's our banker, it's the kind of banker I'd want. A
A closer look at the U.S.-P.R.C. economic relationship,
including the financial part, reveals that it's the P.R.C. that
needs to be cautious, not the U.S.
The relationship starts with trade. Americans buy things made in
China. Lots of things, to the tune of $337 billion last year. We
trade with them to get very cheap, high quality clothes and
consumer electronics; they trade with us to get the jobs making
those things. Advantage: U.S.
Why? Because we can get our clothes elsewhere, at prices not too
much higher. But the Chinese would have a tough, probably
impossible, time replacing the high-quality jobs involved in
sending $337 billion worth of stuff to the U.S. Here's the up-side
to our credit card culture: The American consumer is
That leaves the financial side, where they buy our bonds. Does
this balance our greater power in trade? Not really. Buying our
bonds doesn't give the P.R.C. that much leverage over us because
they lack viable alternatives -- largely because so much money is
Subtracting how much China paid for U.S. goods and services last
year from what we paid them leaves the P.R.C. $266 billion ahead.
The year before, they racked up $256 billion that way. And they
have even more dollars from investment and trade with countries
that use dollars. The bottom line: Beijing has a whole lot of
greenbacks on its hands, even by Washington, D.C., standards, and
the number has been getting bigger every year.
Now for the most important part of the discussion: China can't
spend the money at home.
Beijing has set up a system whereby (1) money can't flow freely
in and out, and (2) China's central bank -- the People's Bank -- must
buy dollars from whoever wants to sell. Say the Chinese government
gives 100 billion in dollars to the Ministry of Education to
improve schools and the Ministry sends that money out to the
provinces. Schools can't use dollars to pay teachers or
construction workers because those people use yuan to buy food,
clothes, and so on. Individuals can't even, by law, send dollars to
Whoever ends up with the dollars will want yuan. Who gives them
the yuan? You got it: the People's Bank, which buys back the
dollars it just gave away. The People's Bank must, by law, buy all
dollars it is offered. So nearly all dollars end up right back
where they started. Nobody seems to quite believe this, especially
inside China. Poor Yi Gang, People's Bank deputy governor, has to
repeat every month that reserves must "unavoidably" or "inevitably"
be invested outside the P.R.C.
Now, "outside the P.R.C." still seems to leave Beijing a lot of
investment options. Here's where the sheer amount of dollars comes
in: It's very hard to find places to invest all that money. For
example, China already has bought more oil than it can store and
there's not enough gold available on the planet to buy with just a
year's worth of China's trade surplus.
Chinese state firms are working hard to invest overseas, but
this isn't nearly enough, either. Excluding bonds, China's
"outward" investment soared 64 percent last year. But that was
still less than half of "inward" investment. Beijing just can't
keep up. Countries including the U.S. are keen for China's dollars,
but only on very narrow terms: They seek very large sums for small
stakes in troubled companies. But those same countries basically
forbid the P.R.C. from buying the colossal amounts of stock or
property it could afford to buy.
The only market open to the P.R.C. and big enough to absorb its
dollars is our bond market. That's why China has at least $1.1
trillion, and maybe as much as $1.7 trillion, already invested in
American bonds. That's why China moved $200 billion into U.S.
Treasury bonds last year, even though the interest rate was
dropping like a stone. Beijing knows it has no real choice, even if
it's very useful to pretend it is America which has no choice.
One last thing: while the U.S. has the stronger hand, we're
using it to slap ourselves. China is about to get much less
important as a buyer of our bonds. The amount they buy is tied
tight to their trade surplus with us, which isn't going to soar
this year and may drop. Meanwhile, the amount we are going to
borrow (from everyone) is going to soar, so President Obama and
Congress can have their $1.75 trillion deficit. While we're patting
ourselves on the back that Chinese bond purchases don't mean much,
we should remember that selling all these bonds to anyone is a sign
the U.S. is in trouble.
Derek Scissors is a research fellow in Asia
economic policy at the Heritage Foundation.
First Appeared in The DC Examiner
Trade, human rights, North Korea, naval standoffs ... America and China have plenty to talk about.
Derek Scissors, Ph.D.
Senior Research Fellow
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