The American Spectator : China's Securities

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China's Securities

By George H. Wittman on 9.24.10 @ 6:07AM

It needs its export trade with the U.S. a lot more than we need to be in debt to Beijing.

Whenever the subject of China arises, the issue of Beijing's ownership of 21.9% of foreign-held U.S. Treasury securities (May 2010 figures) immediately is mentioned. Supposedly this factor provides China with considerable leverage over the United States, even though Japan holds 19.8%. In fact, depending on the extent of pain Washington is willing to inflict on the American financial scene, the U.S. need not be overly worried. It's China that is in the position of greater vulnerability.

To begin with, China is well aware that it has no substantial alternative to its exports to the United States that, for example, amounted to $297 billion for the year 2009, approximately one quarter of the value of all its worldwide exports for the same year. And this figure was down from the previous year. The first thing that would occur on the occasion of China's refusal to accept any more Treasury securities -- or even a severe limitation of such -- would be a requirement by Washington to make serious changes to balance the government budget. Such action clearly would firm the value of the dollar.

While such an increase in dollar value adds to the overall market value of U.S. securities held by the Chinese, it also reduces the current yield of the instruments that are held. Beijing then might seek to sell these valuable instruments, but as they have a coupon value substantially reduced, there wouldn't be many takers. Better for China just to hold on to the U.S. paper until maturity. No leverage there.

If the Chinese just stop buying U.S. government securities and Washington succeeds in taking successful steps toward a balanced budget, the American stock markets would be expected to rise substantially, providing major cash inflows for publicly traded industries, pension plans, and ---tax revenue. That's the optimistic side of the prognostication.

More realistic would be the natural rise of interest rates acting as a brake on some sectors of the U.S. economy. All in all, however, the impact of a major reduction in China's purchasing of U.S. Treasury securities might be just the shock needed to force serious cutbacks in U.S. Government spending. Does Beijing really want to aid the American economy to that degree?

What the Chinese have to do in any scenario is work toward bringing greater investment to development of the predominantly rural western half of their country. Here is where the need is most obvious when it comes to empowering a rising consumer base, the key to China's economic future. So far they have made the right sounds, but serious sustained action is lacking due to internal political disagreements over where development emphasis should be placed.

The figure of 36% of GDP generally has been used to characterize Chinese dependency on foreign trade. That large figure would be far less if Beijing had taken serious steps to enlarge its consumer base presently only equal to a single major member of the European Union even though China has a population of 1.3 billion. (600 million -- urban and 700 million - rural).

The fact is, however, that the cities of coastal China have been modernized often to the point of extravagance and 21st century creativity at the expense of traditional cultural values and social cohesion. Their luxurious architectural appointments have given new meaning to Gordon Gekko's theme of "greed is good."

Rural China meanwhile lives in traditional poverty and 19th century housing and transport conditions. Migration of the youth eastward to the coasts has become a natural passage of life -- as has their devastatingly disappointed return back west. Rural unemployment figures are completely clouded by the lack of reliable statistics, but the to- and- fro movement of millions of rural youth unmistakably tells the story.

With this situation as the background to a summer of far too public disagreement between China and the United States over the value of China's currency, the renminbi, there has been a well-reported recent effort by Beijing to lower the decibel level of conflict over financial issues. Unfortunately, the reasons behind the effort to seek a lowered tone are less economic than strictly political.

The Chinese appear to have no real interest in pressing on with an American-desired exchange rate reform leading to an appreciation of the officially recognized value of the renminbi. Last June Beijing announced it "would allow greater flexibility" (as the N.Y. Times optimistically put it), but then the Chinese government played its usual game of working the international markets to keep its currency from a speedy rise that would injure Chinese export product competitiveness.

China's president, Hu Jintao, however, is looking forward to a state visit to Washington in early 2011 prior to his own leaving office the next year. The Chinese may be willing to toss a bone to the American administration in the form of further utterances regarding their currency flexibility. But as Foreign Ministry spokeswoman, Jiang Yu, said in her excellent English, "Our exchange rate reform can't be pressed ahead under external pressures."

To participate in this game of international financial poker, Washington had better come up with some smarter players than Larry Summers, director of the National Economic Council, recently negotiating in Beijing and now returning to Harvard. The Chinese, who always take a longer view, are undoubtedly gauging their next move in terms of how long they may have to deal with the Obama administration. Washington had better be thinking about what they are going to do with Beijing post-Hu Jintao.

About the Author

George H. Wittman writes a weekly column on international affairs for The American Spectator online. He was the founding chairman of the National Institute for Public Policy.

Letter to the Editor View all comments (23) | Leave a comment

Alan Brooks| 9.24.10 @ 8:19AM

The Chinese will need our grain for a long long time.

Dixie Pixie| 9.24.10 @ 10:38AM

Just a quick question Allen.
Was it a good idea to accept Chinese financial chains in exchange for selling our grain.

The USA import/export relationship is identical to a Mercantilism variant.
Our trade relationship is that of a economic colony to the Chinese manufacturing center.

Specificity, The USA exports raw materials to China and receives manufactured goods in return.
As a result economic value flows from the colony to the center and over time increases the economic dominance of the colony.

Under the current economic relationship forged by Liberalism the Chinese will create a position of economic dominance over the USA and control our society through golden chains.

Is this really a good idea even though it makes the American and Chinese Ruling Classes very rich.

fundamentalist| 9.24.10 @ 12:53PM

Dixie, the center-periphery theory of economics was nothing but warmed over Marxism in drag and every economist in the West abandoned it a long time ago. International trade does not give anyone power over anyone else.

Dixie Pixie| 9.24.10 @ 1:54PM

Greetings Fundamentalist

Mercantilism is a longstanding and legitimate economic theory. It was developed and utilized by the Europeans from 15th to 18th centuries in their successful drive for world domination. It most useful in controlling and exploiting a economic colony for the gain of the Mercantile country.

It has been well known that China has been using Mercantilistic policies for decades. When Bush 43 was asked if he would contest the Chinese policies which was moving American jobs to China, he said:::

It does not matter as the lower cost of goods will increase corporate stock values and lower prices for the populace.
Bush was betting the farm on the “Investor Class” not the “Working Class”.

Both the Democrat and Republican leadership have known the cause of the “hollowing out” of the American economy for decades. Both have supported China's Mercantile policies for their own reasons.

Both leaderships would rather deny reality than to admit they were causing the USA economic damage. The wealth the China/USA trade policies created for the Ruling Class more than compensated themselves for the damage they did to the USA . That is why the Ruling Class will not admit what is happening, as there is too much money in it for themselves.

On a other matter.
Alan, I humbly apologize for misspelling your name.
I really should proofread my posts better.

Alan Brooks| 9.25.10 @ 6:32PM

Not merely the ruling class, but also the middle class is not as bad off as you might think; at least not now. I am so not interested in predicting the future anymore-- too many variables as 'systems' grow more complicatedThe poor? it does aooear that Jesus was right: the poor we will always have with us.

roger| 9.25.10 @ 10:14PM

China will not bow to US pressure to allow currency to rise
China will not repeat Japan's mistake in the 1980s and let its exchange rate surge in response to foreign pressure, said an adviser of China's central bank on Sunday, firing back at increasing pressure from the United States over China's foreign exchange rate policy.

fundamentalist| 9.24.10 @ 12:59PM

We import from China consumer goods that we cannot make in the US as cheaply as the Chinese can make them. That lowers the cost of living for the US. We used to import these same items from Japan and Korea. Within a few years we will import them from Thailand and Viet Nam instead of China. We are far better off importing these consumer goods from China than trying to make them ourselves. And as the Chinese become wealthier, they will buy more of the things we excel at making, such as electrical generators, aircraft and bulldozers.

The high level of the trade deficit at the moment is the result of the Fed's monetary expansion. Let the market adjust rates, which today would mean higher interest rates, and the trade deficit will shrink.

Also, reduce federal guv borrowing and the trade deficit will shrink. The feds have no choice but to borrow to finance deficit spending. Whoever lends to us will need dollars because we can't spend yuan. In order to get those dollars, the lender must sell us something. Then they will have the dollars to lend us.

Dixie Pixie| 9.24.10 @ 2:09PM

Fundamentalist

For further enlightenment, may I suggest reading “ How to Win the Trade War with the Democrats” in today’s “American Thinker”

http://www.americanthinker.com....._with.html

fundamentalist| 9.24.10 @ 6:03PM

That's not enlightenment; it's 17th century economics. Learn real economics by reading Hayek or Mises. Or for modern authors try fee.org and mises.org.

Dixie Pixie| 9.24.10 @ 9:23PM

Greetings Fundamentalist

I am not a economist nor do I play one as a television pundit.
So I will be brief.

Obama hired the top minds the Harvard Yard and the Ivy League could produce.

Armed with the latest and greatest economic theories, they claimed to be able run the economy better than anyone. They had everything needed or wanted including trillions of dollars.

How is Obama doing now?
Is your economic life better or worse under Obama.

I can still see November from my house.
Will Obama hear us then?

PS: Just because something is old does not mean it is not useful.
We are still using wheel theory for over 6 millennium.

Dixie Pixie| 9.24.10 @ 11:01PM

Fundamentalist --- Upon further reflection I can simplify the choice further.

Under Mercantile economic policies a nation/state can leap from a economic backwater to global dominance in a single generation.
The Dutch proved it.
The French proved it
The British Empire proved it
America proved it so.
The Chinese are now proving it so.

Under the “advanced” economic policies of “Free Trade Theory” and “Keynesian Theory” global dominance is lost in a handful of decades.
All proved by the Dutch, French, British, and now American economic policies.

The Chinese are now in competition for the 2nd largest economic power.
They will soon be in competition for first place due to Mercantilism.

It is time to dump Obama's economic policies before it is too late.

Dai Alanye| 9.24.10 @ 2:13PM

I'm having trouble understanding 'fundamentalis.' Just what flaw in the Chinese character or DNA makes it impossible for them to manufacture "…electrical generators, aircraft and bulldozers"?

Or, if you wish, what assures us that America will continue to have something to trade beyond basic foodstuffs and mercenary services?

The effects of our policies have been to put American workers on the dole, import legal and illegal aliens to do low-paid jobs, and import cheap products to sustain our consuming lifestyle while borrowing the funds to pay for all this. Eventually this bubble, like the housing bubble, will break and leave us financially ruined.

I sincerely believe we need to raise import tariffs on manufactured goods, thereby both gaining tax monies from sources other than individual income and increasing employment opportunities for Americans. Concurrent with that we need to reduce welfare and support payments of all kinds in order to encourage American citizens to replace illegals in "those jobs Americans are unwilling to do." Those jobs, in other words, that previous generations of Americans willingly did because they had no cheap labor to do it for them.

Under present world conditions, continuing down our present track of unlimited free trade combined with unlimited foreign borrowing seems to be inexorably leading toward national bankruptcy.

fundamentalist| 9.24.10 @ 6:01PM

What I wrote above is standard economics. I admit that it is counter intuitive, but a lot of economics is. I can't give a lesson in econ here, but if you study econ you'll find that China is not our problem. Our problem is high taxes, heavy regulation and deficit spending by the state.

Steve Ryan| 9.25.10 @ 11:47PM

sounds like common sense doesnt it :) i never understood how have the rest of the world do all the buildind and manufacturing and us just be consumers had a long life span to it, or as my freind used to say are we just going to set around and shine each other shoes( service industry stuff)

Oldefarte| 9.24.10 @ 1:19PM

The US needs to re-establish a solid, non-union manufacturing base within this country. Labor unions, although once essentially needed, have long outlived their usefulness, and need to be legally banned from operating [due to their excessive union wage ABOVE that of a true market wage]. Japan's non-union automakers in this country have destroyed Detroit's American car manufacturers due to the latter's union wage burdens. We must begin again to manufacture goods/products in this country, but before that can be accompolish that, the political hold that labor unions have upon the Democratic Party must be permanently broken [there are now adequate laws/regulations on the books that can deal with the previous labor violations within manufacturing, and labor unions are no longer needed for same]!!!!!!!!!!!

Gill O’Teen ✝✡$| 9.24.10 @ 2:09PM

fundamentalist, just curious, wouldn’t we be better off making stuff we need ourselves and buying it here instead of overseas? Wouldn’t we be better served exploring ways of restoring OUR Country to the industrial powerhouse that defeated both Japan and Germany in the 40s and then rebuilt Japanese and non-Soviet Europe? Or are we better served redistributing our wealth so obummer’s brother can afford a bigger hut?

I began tracking the Dollar / Yuan currency cross on March 20 last year. Using the numbers provided at www.x-rates.com which I check about 4:15 PM ET daily, back then $1 bought 0.1464610 Yuan. Yesterday that $1 could buy 0.1490790 Yuan. This is an increase in purchasing power of the dollar of $0.0026180 (1.756%). This is good for Americans as any visit to Wal-Mart will quickly reveal. But it won’t help the balance of trade. Last night our trade deficit with China was $242,818,752,113, almost a quarter billion bucks. Presently, the dollar is teetering on collapse. When the fertilizer hit the fan in Greece last May plunging the Euro as low as $1.1941900 on June 8, the Dollar Index had just hit a top, since I began tracking this, of 88.490. The crash of the Euro last May stimulated the recovery of the dollar which by my records hit a low DI of 74.260 late last November. With the recovery of the Euro, thanks to Germany’s sending huge wads of cash to Athens, the Dollar Index dropped to 79.791 last Wednesday evening recovering slightly to 80.083 last night. China’s biggest concern with current American stupidity is that helicopter ben in his propeller beanie will decide to repay OUR massive debt with fiat currency. Folks who like to joke about the printing presses in the Treasury basement running nonstop are a tad behind the times. All beanie has to do to create billions of bucks instantly is buy an equal amount of tax cheat timmie’s bonds using an electronic fund transfer. Poof! Gigabucks by the boatload literally out of ether. beanie is already making noise that he will do so. There was evidence presented by Fox Business Network contributor Charles Payne on Glenn Beck’s show last year that it was already happening. There is anecdotal evidence that the Plunge Protection Team, created under Ronald Reagan to protect us from a dropping Stock market, has been as busy as beavers placing numerous long-dated call options on a few well-chosen stocks whenever stacks have fallen significantly. Unfortunately, Chuck Butler of Currency Capitalist, was not more specific on how I can track this other than to hint that he has detected large sums of cash enter the market near the end of the trading day and that long-dated calls tend to drive up the DOW. I began starting the daily graph of market activity provided by the New York Stock Exchange and have found that often when the Dow begins to drop to a low, the line starts to move up dramatically to a peak often within a half hour. I have no way of knowing if any of this is PPT at work or simply due to robotic triggers placed by professional investors, “If a share of GM drops to 20¢ buy 1,000 units”; or “If a share of GM reaches 50¢ sell all.” I just checked the Wall Street Journal and GMC (in liquidation) last traded for 26¢, a drop of a cent from last night’s close.
http://online.wsj.com/quotes/m.....pe;=defrnk

If burnbuckie gets busy with his [Enter] key, the real value of foreign investment in the U.S. will decline. This is why the price of Gold is at a record high. The Chinese and other foreign investors are hedging their bets. Right now the Dollar Index is only saved from a plunge to oblivion because OUR buck is still the preferred medium of foreign exchange. If Japan wishes to buy oil from the Saudis they must first use Yen to buy Dollars, then they can use those Dollars to buy Riyals which are pegged to OUR Dollar at 0.266667 Riyals each. However, already there are countries which have agreements with the Chinese to cut out the middleman and buy direct. The Chinese as well as the Arabs have been studying how to make one of their own currencies the new international standard. Just remember, that the problems in Europe have not been solved as evidenced by the recent protests in France because their regime is seeking to raise their retirement age from 60 to 62. Once Germany runs out of other people’s money, so will the Greeks and all holy heck will rain fire and brimstone upon our lives, liberties and pursuits of happiness.
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
“Be afraid. Be very afraid.” - Geena Davis (as Veronica Quaife in 1986 horror film The Fly)
Only 849 days to go

Gill O’Teen ✝✡$| 9.24.10 @ 3:36PM

Oops, $242,818,752,113 is almost a quarter trillion (not billion) bucks. Sorry.
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
“The stupid neither forgive nor forget; the naive forgive and forget; the wise forgive but do not forget.” - Thomas S. Szasz
Only 849 days to go

Roy| 9.24.10 @ 5:10PM

We already do that. And then we make more of it, and sell it to other people. Then they make stuff we want and sell it to us in return.

I think tariffs let the government off the hook. First, the government makes us uncompetitive with minimum wage laws and regulo/litigo-blather. Then the consumers attempt to buy from people who have not had these costs imposed, so the government points a gun at them and tells them they can't. How anyone can promote this behavior and then say they favor freedom is hard to understand.

All that said, even in a perfectly free market world, a poor Indian making $2 a day is going to be willing to do unskilled labor for a lot less than an American. If I hire that guy then I benefit and he benefits, and the only one who doesn't is the guy who imagines himself to be entitled to 25 times the pay for the same work.

fundamentalist| 9.24.10 @ 6:05PM

Gill: wouldn’t we be better off making stuff we need ourselves and buying it here instead of overseas?

Not if it costs us more to make it. Look up the principle of comparative advantage on the internet or wikipedia.

Gill O’Teen ✝✡$| 9.24.10 @ 11:15PM

Our Country was founded on free market principles. Somewhere along the way, we lost that and now have an entitlement economy which is ultimately doomed to fail as entitlement demand will ultimately overwhelm funding capacity, and the freeloading class tends to throw tantrums when not appeased. On that cheery note OUR collective unfunded liabilities climbed to a mere $110,548,654,442,291 today. This is an insignificant 759.718% of GDP. It would take 100% gum’mint confiscation 7.6 years to pay that off, and that does not include accumulating interest on the unpaid balance.

A big advantage the North had over the South during the Civil War was its huge industrial base. We helped win the first war to end all war with a huge industrial base, and we used this base to thwart Japanese Imperialism and Germanic Socialism simultaneously after that. Now if we need to defend ourselves we have to buy our energy from islamo-tyrants and our materials from kommie-pinkos. China may be our trading partner, but it is hardly our friend as its sheltering Iran and North Korea clearly shows. The oil sheikhs may pretend to be allies, but their religion instructs them to either kill or enslave us. What if we need to buy uniforms for our Soldiers in the field and the chi-koms tell us, “No”? What if the gas tanks in our brave warrior’s vehicles run dry and sheik yurbooty tells us to convert or else?

I am a free market fan, but spare me that poor Chinese rice farmer willing to work for a dime a month line. We were competitive once and China’s is a slave economy. And personally, I’m bothered that any of my money is being used by that politburo to force that rice grower to make the steel from which his chains are forged. In my neck-of-the-woods there were real factories making real stuff into the 70s. Now even the King of Beers is owned by foreign interests. North Carolina used to have textile mills from which I bought plenty of goods in the 80s. All gone with the wind. It’s as if a reincarnated Sherman marched from sea-to-sea destroying our will to fight for a stronger more secure Country.

If I can buy a better car for a fair price from a Japanese company than from gum’mint motors that’s what I will do. But we had better figure out how Americans can regain their competitive self-sufficiency before it’s too late.

By the way, The Dollar Index limboed under the 80 mark again today to 79.292, dipping to its lowest since the collapse of the Euro last spring. Meanwhile, the Debt:GDP ratio climbed to 92.788% by my calculation and to 94.5% according to the National Debt Clock’s second calculation http://www.usdebtclock.org (for some strange reason they provide two differing numbers - their first is usually close to mine). My projection is that if this continues increasing at a simple linear rate, we will hit the 100% ice floe next June. That means that if the gum’mint confiscated everything we would only pay off the debt. But it’s worse than that since GDP is calculated using gum’mint spending as a component, and they can’t steal everything from us twice. Explains why helicopter beanie propeller is revving the motor on his whirlybird and loosening his throwing arm.

The issue is not simply whether or not I can buy a Japanese tee vee for 50 bucks less than a Korean one. The issue is when all the pieces of the puzzle are put together just what is the best package deal for the American People. Just maybe if I pay $60 more to an American company for that tee vee, all my other costs will decrease by $61. Wouldn’t that be a better deal?
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
“There is no dependence that can be sure but a dependence upon one's self” - John Gay
Only 849 days to go

fundamentalist| 9.25.10 @ 1:01PM

Gill: "Just maybe if I pay $60 more to an American company for that tee vee, all my other costs will decrease by $61."

No, they won't. If you have to pay $60 more for a TV, then you will have $60 less to spend on other things, like airline tickets and the airline industry will suffer.

Why don't you raise your own cotton, spin and weave it and make your own clothes? Because other people can do it cheaper and better, right? The money you save by letting someone else make your clothes allows you to buy more of other stuff, such as meals at a restaurant.

The US has among the lowest total labor costs in the world, even lower than total labor costs in China. Total labor costs include productivity, not just wages. Dollar for dollar, American workers turn out far more than most workers in other countries because our productivity is so high.

Productivity is mainly driven by training and good equipment. But some industries, such as clothing, are hard to automate. They still require large amounts of relatively unskilled labor. That's why those industries gravitate to low-wage countries like those in Asia. The US excels at making industrial equipment, such as electrical generating units, heavy equipment and airliners. That's why we still have the largest manufacturing sector in the world and the dollar value of our manufacturing is larger today than ever, even adjusted for inflation.

But manufacturing still faces major challenges, mainly from high taxes and heavy regulation.

Answers1| 9.26.10 @ 9:33PM

Which would you rather be right now: China, Russia, Europe, India, Brazil, or US? Pretty easy to answer.

Christian Louboutin| 6.23.11 @ 5:47AM

While such an increase in dollar value adds to the overall market value of U.S. securities held by the Chinese, it also reduces the current yield of the instruments that are held.