The Myth of the Chinese Loan Shark

The Myth of the Chinese Loan Shark October 12, 2011

Every time I hear a politician from either party blather on about how we have to “borrow money from China” for any deficit spending, or suggest that we are somehow at the mercy of the Chinese because they own so much American debt, I cringe. I cringe both because it isn’t true and because it is classic fear-mongering (precisely because it isn’t true). Daniel Blumenthal debunks this claim in Foreign Policy:

In fact, China is more like a depositor. It deposits money in U.S. Treasurys because its economy does not allow investors to put money elsewhere. There is nothing else it can do with its surpluses unless it changes its financial system radically (see above). It makes a pittance on its deposits. If the United States starts to bring down its debts and deficits, China will have even fewer options. China is desperate for U.S. investment, U.S. Treasurys, and the U.S. market. The balance of leverage leans toward the United States.

China owns 8% of American debt (treasury bills). They can’t “call it in” as I’ve heard suggested by some terribly ignorant people; those instruments have fixed payback schedules. The most they could do is sell them off to other investors, but A) they have very good reasons not to do so; and B) that would only temporarily and marginally depress the value of those bonds. It is China’s manipulation of its currency to keep it artificially low and therefore keep their products artificially cheap that is a problem for us, not the fact that they buy up a small percentage of our debt on the open markets.

Blumenthal is also correct when he points out that we have far more to fear from a China in decline than a China that is growing richer.

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