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10 China Myths for the New Decade- Myth #4: China’s financial influence

Posted by Author on February 2, 2010

Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via http://www.heritage.org, January 28, 2010 –

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Myth #4: China is America’s banker.

Truth: If there was ever any Chinese financial influence, it is not there now.

The U.S. federal government is running, and is expected to continue running, a gigantic budget deficit, which will hurt the economy for the next decade. China buys some of the bonds to finance that deficit and has about $800 billion in official holdings of U.S. treasuries, plus perhaps that much in other types of holdings.

Even so, the conventional wisdom–that America needs Chinese financing to continue its wild spending–turns out to be wrong. Partly because of the damaging jump in the size of the deficit, Chinese bond purchases have become irrelevant.

Official Chinese purchases of U.S. Treasury bonds are on pace to fall well below $100 billion for 2009 (the full-year total is published in February), while the federal government deficit soared to $1.4 trillion. Yet U.S. commercial interest rates are lower than at the end of 2008, when official Chinese purchases were equivalent in size to nearly half the federal deficit.[7] Official Chinese holdings of treasuries equal less than 7 percent of U.S. government debt.[8] Chinese bond purchases no longer seem to matter, if they ever did.

In addition, when Chinese purchases were large, it was because Beijing had no choice but to buy American bonds. The PRC can take in a great deal of money from the world through its trade surplus and other activities. The same rules that keep the Chinese currency undervalued keep Beijing from spending the world’s money at home. Most foreign money disbursed in China ends up right back with the central government, by law.[9]

That can leave the PRC sitting on a huge pile of dollars and the U.S. economy as the only place big and solid enough to absorb it back. China has not been lending; they have been investing the only way they can.

Finally, the bulk of China’s pile of foreign money can be traced back to the Sino-American trade gap. On exactly the same lines, the PRC ties its currency to the dollar. Linking itself closely to the American economy that way is also the PRC’s best choice. In contrast, any American financial dependence on China has almost vanished.(to be cont’d)

Original from The Heritage Foundation

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