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Should We Worry About The Chinese?

Talking about the current accounts deficit in recent days, I've noticed a lot of scare-oriented commentary about the fact that the Chinese government owns a big chunk of our currency. And fair enough: It's a scary-seeming thing. But it's worth saying a couple of things about this. The first is that most of our government's debt is held domestically, as this chart shows:

Estimated_ownership_of_US_Treasury_securities_by_category_0608.jpg

And even given that foreign countries hold a minority of U.S. Treasury debt, the Chinese only hold a minority of that minority:

Foreign_Holders_of_United_States_Treasury_Securities-percent_share.gif

And in reality, the situation is a lot trickier for China than it is for us. The economist Charles Lieberman has a nice column explaining why:

Like it or not, the Chinese are stuck with a simple and stark investment choice, accumulate dollar assets or allow their own currency to appreciate to reduce the trade surplus that is helping their economy develop. They can play around the edges and buy some euro-denominated assets or commodities to deploy some of their surplus, but those options are fairly limited. The rhetorical question, what will we do if the Chinese stop buying Treasuries is best answered by the conclusion that the Chinese have nowhere else to go unless they are willing to allow a much slower pace of development of their domestic economy. Given that Hobson's choice, they will continue to buy dollar assets, even if they object to it periodically. And they do this strictly out of their own self interest, not out of compassion or sympathy for U.S. policy needs.

In other words, Beijing's appetite for dollars is a development strategy. If their purchases stop, so too does the rapid pace of their development, as their exports become pricier and thus less competitive on the international market. And in a country as large, as poor, and as unequal as China, rapid growth is a necessity, not a luxury. Their economic equilibrium is a lot more fragile than our economic equilibrium. And both countries know it. Which is all to say that though there are a lot of things worth worrying about right now, the Chinese abandoning our currency isn't really one of them.

(Hat tip: Stan Collender; Graph credit: Wikipedia)

By Ezra Klein  |  June 16, 2009; 11:08 AM ET
Categories:  China  
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Comments

And one of the reasons unequal and slower economic growth is not acceptable to China is it is a single party totalitarian system without public mandate and participation. In case of India, as long as people have been able to kick out incumbent political parties via elections, such a participation kind of made it okay to have slower growth or inequality to certain extent. In other words appetite of people to accept slower growth increases in a democratic system compared to a totalitarian system. The political compulsion for Chinese Communist Party to keep the Dollar peg of the Yuan fixed is very high so as it does not destroy their export engine which helps them to bring prosperity to larger populace and continue their hold on power.

So if Americans want to continue the high debt life style, they should simply keep on helping Chinese Communists to have their stranglehold on Chinese population! That should work. Meanwhile we will see if Mandarins decide to get down from this high risk strategy by igniting domestic demand in order to remove their reliance on exports.

Posted by: umesh409 | June 16, 2009 11:53 AM | Report abuse

This is an outstanding post. Well done, Mr. Klein!

Posted by: Dellis2 | June 16, 2009 12:44 PM | Report abuse

Well, what actually increases quality of life is increases in consumption + increases in environmental quality + increases in leisure (non-work) time.

Exports merely provide the funds that might be used to finance those things. Currently a lot of those funds are being diverted into maintaining a weak currency, so that they can accumulate more funds, which are then used...

If they ever want to consume more, then they are going to have to liquidate their treasury holdings, which will tend to increase yields, although the effect on the dollar will depend on other factors, such as what happens with the dollar cash that the Chinese will then be spending.

Posted by: albamus | June 17, 2009 7:13 AM | Report abuse

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