Fareed Zakaria's Nov. 24 op-ed, "Lifeline from Beijing," included a number of popular misconceptions. To dispel the first: China did not become our largest foreign creditor in September; it became the largest holder of Treasury bonds. China has been the largest holder of U.S. public debt for several years. In September, it merely switched from agency debt to Treasurys.
Second, the $600 billion Chinese stimulus package that Mr. Zakaria discussed is fraudulent. Not only was the vast majority of the money previously committed, but the central government also guaranteed only one-fourth of the repackaged total.
Third, there is no dilemma for China in financing our spending vs. its own. China's financing of our spending comes from foreign reserves that cannot be used at home. This is an oddity of its currency controls, under which foreign currency must end up with the central bank.
Mr. Zakaria argued that the United States needs China more than China needs the United States. Our increasingly lavish borrowing would be expensive without China's help.
Against that, our trade deficit with China was the equivalent of 6.6 percent of China's gross domestic product through September. China is helping us try to avoid a 2 to 3 percent decline in GDP in 2009 and 2010; we are enabling them to avoid a 6 to 7 percent decline every year.
Derek Scissors is a research fellow in Asia economic policy at the Heritage Foundation.
First Appeared in The Washington Post