What the U.S. owes China

PHOTO: Shanghai skyline

Although the Chinese government keeps the exact data secret, it’s reasonable to believe that the United States now owes communist China $1.5 trillion. That’s an average of $6,000 owed per American.

James Fallows, of the Atlantic, manages to make the Chinese debt issue more understandable in a recent article (which you should definitely read in full [economics can be fascinating {seriously}]).

Some highlights:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.
[…]
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.

Fallows writes that China is willing to slow it’s own growth in order to control the already growing tensions between the rich and the poor:

The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built.

This has a few consequences for Americans. As our biggest investors, we will have to afford the Chinese government their due influence. Like any investor, they will want to protect and manage their investment. That’s the bargain we’re in. That’s not necessarily a bad thing, but the Chinese communist government is notoriously secretive. Being secretive has have historically led to economic instability. Think back to the waves the enigmatic Fed chief Alan Greenspan could make just by scheduling a public address.

The theory behind why the current situation will endure is that the Chinese would be crazy to do anything that would weaken the dollar because it would hurt them grievously, since most of their investments are in dollars. The problem, according to Fallows, is that any number of situations could unsettle this balance: a flareup over Taiwan, a bad investment that could piss off enough Chinese people, a Dubai ports type scandal that could piss off the Chinese government. There are a lot of frightening possible.

My friend Dylan likes to say that these sorts of economic entanglements help preserve the peace. I think there is a lot of truth to that notion. Logical people/nations are unlikely to cripple themselves economically just to settle a grudge. However, we can’t let ourselves be quite so vulnerable to slight economic mishaps — absent of malice — that Fallows warns about.

More importantly, this situation absolutely can’t go on forever. We could conceivably remain in debt in perpetuity, but the debt has to remain managable. The debt should shrink in times of economic strength and grow in times of weakness, not grow constantly. Getting the situation under control means we have to be willing to trade short term economic gain, currently at China’s expense, for long-term economic viability. This means controlling government spending and making our economy more efficient so our exports are competitive. I think trading the costs of the Iraq war for universal health care would be a good start.

Flickr photo of the Shanghai skyline by pmorgan

29 Comments

  1. Cameron

    I think you’re forgetting that, unlike household debt, national debt has many more tools available to it to become manageable. So there’s really nothing to lose sleep over here as long as we’re responsible about it — and I’ve yet to read anything that suggests we’re not and makes a good case of it.

    Just as an example, a common complaint people have is our trade deficit with China (and in general). A trade deficit is a sign of a *healthy* economy. Think about it. Which would you rather have? A pile of money or a pile of stuff money bought you? If you picked the pile of money — which is only so much kindling or 1’s and 0’s in its various forms — then you’re a mercantilist and need to go take an economic history class.

    But yeah. I think it’s very interesting and very relevant to world events, but I don’t think this is anything bad.

  2. Chris

    @ Cameron

    I think my final paragraph speaks to your comment. Our debt should shrink during good economic times, so that we can better weather the bad cycles. America hasn’t done that for about 20 years, if I recall correctly.

    Also, what’s your opinion on the shrinking value of the dollar? Are these issues related in your mind?

  3. Cameron

    The exchange rate sucks because I like to travel a lot. But you have to remember that a strong or weak dollar are both good for some parts of the economy and bad for others. A weak dollar is bad for importing things from other countries. It’s great for selling American goods and services abroad though. Maybe some of those call centers in India will move back here. Ha.

  4. Chris

    Well, we import an awful lot of things essential to our economy, like cars, oil, computers/computer parts.

  5. Cameron

    We only import them because consumers prefer them for either pricing or quality reasons. Cars are a good example — a weak dollar might be a godsend for an American auto industry that inexplicably can’t make a decent car as cheap as the Japanese and Germans. But if those foreign competitors are more expensive?

    Meh. Changes have interesting effects and are bad because someone wins and someone loses and it’s arbitrary. But it’s not really bad for our economy as a unit usually. It just shifts more toward domestic production and sometimes lowered levels of consumption as foreign products become more expensive and domestic ones keep their current prices. Hell, the boom in tourism is a good example. NYC has been selling oodles of things to European tourists lately, but not importing as much in the way of fancy European stuff.

  6. Ian

    I thought that the majority of foreign brand cars sold in the US were also manufactured here in the US. I could be wrong, but I thought that to be the case. European cars are another thing, but I think Honda, Toyota, and their respective luxury lines Acura and Lexus are made here.

    Likewise with computers Chris. Intel is an American company, as is Motorola. If those companies have moved their means of production overseas, it is only because that allows them to produce their chips cheaper over there. And regardless, computer chips themselves are pretty cheap to manufacture. The extra cost you pay is for electronic packaging and for the R&D. The majority of computer chips sold today are not Pentiums or high end chips, but instead smaller, simpler, cheaper chips that are more general in their utility.

    But lets be honest here, the most important things are not cars and computers. Both of those could be seen as luxury items for most people. What is important is food, clothing, shelter, and infrastructure. Lots of foods are imported, including much of what you see in your produce section. Its not just wine and cheese. I think we are generally OK with clothing seeing how the southeast is a major producer of cotton. Cashmere sweaters may go up in price but oh well. I honestly can’t say how much of our building materials are imported. Infrastructure is a big problem I think. Oil is a major import and I think there is plenty of discussion about that around. Transportation of all goods is affected by oil prices.

    The sky isn’t falling to be sure, but its not exactly clear and blue.

  7. Ted

    I am at a loss for words
    [Spam removed – Chris]

  8. pigsnot

    I like turtels

  9. Good article. But it seems odd you want to move health care towards socialism while China’s move toward capitalism has unleashed the growth that will ultimately pay for fat living for her citizens.

    Suggestion: Read the Rand Corp. health care report. I dug and dug to get past all the politics before finding it, and you might like it. There was a link on Hillary’s site to it if that’s still up. Otherwise Google.

  10. Chris

    I want to move health care towards “socialism” as you call it, because the profit motive for the insurance industry subverts the very idea of health care.

    Instead of covering people who need health care the most, or supplying the best treatment for a particular ailment, your insurance company is figuring out the cheapest way to treat you, and barring that, a way to cancel your insurance altogether (which means crushing medical expenses or tax payer funded trips to the ER).

    Meanwhile, we pay far more per person for health care than any other country in the world, including countries that cover all of their citizens and happen to have better healthcare outcomes.

    Not only that, but businesses in the US are starting to realize that they can’t keep providing health insurance in our broken system. The burden is too expensive and is crushing their competitiveness.

  11. I hate to be the one that tosses a t–d in the punch bowl, but what about all the WWII debts European countries owed the U.S. They simply blew that off. Winston Churchill inferred that it’s a debt that will never be paid. I get so tired of seeing “made in China” on almost everything I pickup in a store. Too many of the small gadgets don’t work properly…ask Walmark, Target or any of the other retailers. Every chance I get, I purchase American made products. Forget about the “labor cost” argument. Most items made in America are done by automation and machinery. Why should it surprise us that these third world countries claim the U.S. owes them a ton of money? What we need is congressmen with balls!

  12. Munish

    We in India have a saying “Making palm tree out of sesame seed”. That’s exactly what Chris’s doing here. Writing Fanatical articles to keep people worried. If US owe some money to china, then its (poor)Chinese people who need to worry about their $4000. In international scenario you can’t force even “Banana Republic” to pay the debts, let alone the almighty USA. Like another Indian Saying “Bogged merchant keeps giving credit”. So let (rich)Americans enjoy this debt because they will pay only by terms and time suitable to them.

    PS. I suggest you change the name of this blog from “why we worry” to “how to worry”.

  13. Ronny

    Then you probably won’t need to worry about the credit card debt… The bank need to worry about lending you their money.

    But in most cases, it ain’t so… Debt need to be repaid, or there will be consequenses. Like it or not.

  14. Chris

    Munish,
    Of course the USA has the option not to pay the money back. But if we don’t then people around the world and at home lose faith in government issued bonds and other forms of securities. The dollar will tumble in value, and our consumer nation won’t have the buying power to continue importing goods from around the world.

    Certainly that will hurt producer nations like China, but they’re working toward the day when they aren’t dependent on us, meanwhile we’re becoming more dependent on them.

  15. Munish

    I personally feel that International economics is much more complex then what meets the eye. I remember reading somewhere that Japanese banks have lended a total loan amount which is two times their original asset values. Such banks survived the financial crisis, infact they are buying US banks and on the other hand (far too ancient) US banks are falling prey to financial crisis. The actual worth of assets depend on the share prices of the company. Share prices are very fragile. And world over share prices mostly or partly depends on US economy.

    Other countries can become partially independent, but no economy can claim to be totally independent. So until there is interdependency of economies, US economy will play the part of regulatory body. Chinese lack such edge and open mindedness. Besides they are widely hated as new nexus of Evil. That makes me believe that US would remain the most stable and world leader economy for many years to come.

  16. Chris

    We could very well remain the world economic leader. But that doesn’t mean we should recklessly borrow ourselves into oblivion.

    I’ve made the case for more deficit spending during this time of economic turmoil, but once we crawl out of the recession we need to find ways to fix the imbalance between borrowing wealth and creating it.

  17. Ian

    This is how I understand it, which might be a little off. Foreign investors buy the dollar when they perceive that the US economy is strong. This allows us to deficit spend and still maintain healthy economic growth. When our economy appears weak as it does now, investors stay away from the dollar because it no longer looks like a safe investment. Thus the value of the dollar drops. This causes countries to be less willing to lend us money which makes us less able to deficit spend and still maintain growth. The US goes through recessions like every 100 months and they last something like 10 months on average. We will recover from this mess and be OK, but damage has been done to the American “brand” which might make it difficult for us to remain the top dog economically. People might be more hesitant to lend us money. Countries may no longer see us as the ideal economic model. There is no guarantee that China’s economic system will work over the long term. They do have an excess of financial regulation but not enough regulation of their products which has certainly been hurting the worldwide view of their food and toy exports recently.

  18. Chris

    Well… right now you are a little off. Because economies around the word are tumbling, we are starting to look like the best of the worst. That’s why the dollar has been rising and foreign investors are treating us as a safe place to park their money.

  19. gas prices are down, finally! i guess all of the big wigs cashed out.

  20. jerome drossart

    sam walker,

    I believe the marshall plan was a gift from the US to europe to help it get back on its feet. it was mostly food and fuel, and was never meant to be paid back. it’s purpose was also political and economical: to keep communism at bay and for europeans to eventually use american products and services. the marshall plan money(about $90billion today) was between 5 to 10% of the capital needed to rebuild europe.
    after that, america loaned massive amounts of money(at a reasonable rate)which did the actual rebuilding of europe.
    those loans were repaid. the UK had a 60-year loan and made its last payment to the federal reserve in december of 2006. so, no, the europeans did not simply “blow off” its obligations to the US.

  21. Mikko Leinonen

    As I see, it´s the rise and the fall of the rome.
    Its been for two decades of spending with other peoples money.
    whilst there has been no any manufacturing in the USA, all has been shifted to another countries.
    And almost all of your GDP:s are services!
    Someone makes you a Pizza, someone washes your shirt, thats ridicilous!
    In the meantime all the other world produces goods that are worth of some. Euros or Yenis or Yuans.

  22. Just default on the debt to China like they defaulted on their debt to us.

  23. helmut

    “just default on the debt to China like they defaulted on their debt to us.”

    when did china owe the US money, how much, and why did they default??

  24. Casey

    Now, June 1st, 2009, we owe an average of $211,000 per American, according to CNBC. Change we can believe in. ??

  25. Ian

    Yeah, cause that debt was accumulated over the last 6 months, right? Not the last 20+ years.

  26. AC

    Let’s just start paying it down, screw the economic recovery let’s make this a prioirty and stop our over-reliance on them. I for one am ready to send my $6,000 to get this off my plate.

  27. Sellers

    AC,
    I would have to be put on some sort of payment plan, but I like your ambition.

  28. Lenny

    Debt to China. Well you Yanks got yourself into this mess.. war costs money. If you want a war, expand your territory, else wasted dollars. So how to pay China. Have to say it.. you going to
    need to sale Hawaii to the Chinese to wipe the debt.. Sorry but its your only way out of very deep shit. I suggest you get back the Panama canal from the Chinese at the same time.

  29. Batam island, April 22th 2011

    In my opinion, What the U.S. owes China US$1.4 trillion is not so frightened the US citizens as long as the money is used for the sake of a good and responsible investment by the US Government perfectly! At the other side, besides its responsibility needs a good report also needs a good transparency to China as the money lender! I think, better the US Government reduce all the expenses: The wars, international politics and all kind of squandering! Most of all, The Good Lord JESUS CHRIST will bless this US country appropriate to the prayers of US citizens.

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