There are lots of reasons to worry about the U.S. economy. But the fact that China holds so much American debt, public and private, shouldn’t be high on the list of concerns.
Let me anticipate two objections. First, the chronic imbalances on each side of this relationship do reflect economic pathologies in both countries. The Chinese government’s long reliance on artificially suppressed consumption, artificially boosted exports, and an artificially high pace of infrastructure building reflects a failure to let its own people enjoy the full benefits of their labor and wealth. And those people, it’s worth remembering, are still only one-sixth as rich, on average, as Americans are. The U.S. government’s long reliance on artificially elevated consumption and an unrealistically low level of savings and capital formation harms the nation’s future and has brought on the deleveraging pressures that are now throttling its economy and the world’s. So even if Chinese holdings aren’t dangerous or destabilizing in themselves, their scale is a symptom of unhealthy distortions on both sides.
And, yes, I will concede that if relations between China and the United States suddenly worsen for some noneconomic reason—a dispute over Tibet or Taiwan; a political crisis; a crackdown inside China—then China’s role as America’s banker and landlord could make an unstable situation even more volatile. In normal circumstances, Chinese money managers would have no reason to sell their U.S. holdings in a panic. On the contrary: By starting a run on the dollar as a currency or on Treasury notes as assets, they would destroy their own main international holdings. But if the two countries moved toward a political or military confrontation, China might wind up using a weapon that would harm everyone involved.
For both of these reasons, China, the United States, and the world economic system will all be better off when the United States relies less on China as a financier and China relies less on the United States as a market.
But those concerns about systemic balance are not what most Americans express when discussing the growing indebtedness to China. Generally, this fear has both moralistic and strategic overtones, and it involves worries that China is playing a farsighted game that will lead to economic domination and ultimately political control over the United States.
Exports provide income for China’s urban migrants now entering the middle class.
I think this perspective misses the real reason why China’s leadership has come to hold so much U.S. debt—and why it has been hard for them to stop. Usually, Chinese policies have less to do with the outside world, and more to do with domestic needs and pressures, than Americans assume. Chinese administrators may consider it a plus to have an ever-growing cushion of U.S. dollars, but that’s a side benefit. For them what really matters is supporting the Chinese export-industry machine, which in 20 years has produced jobs for tens of millions of the rural poor who have migrated to a more modern urban life; exports provide income for people now entering the middle class. Closely allied to this goal is the determination to limit the rate at which the Chinese currency rises in value. Left to market forces, the currency would soar, as with any country that runs huge trade surpluses. Although a gradual rise in the yuan’s value since 2005 has increased China’s buying power abroad, authorities are determined to avoid any sudden change that could injure its exports.
The Chinese government has figured out only one way to do this: by taking the surplus dollars that its exporters earn by selling to Wal-Mart, Dell, and a thousand other firms and, instead of exchanging them on the currency market, lending them back to Americans. These loans return as Treasury notes, direct investments in companies, municipal bonds, and other guises that together amount to “America’s debt to China.” But from China’s point of view, their origin is “jobs for people from the provinces.”
It’s a problem for China that it hasn’t done better in matching its enormous output to its own people’s unmet needs. The United States has the opposite problem—that it hasn’t matched its appetites to its means. This is a mismatch, not a plot—but still one that both countries must solve.
The author is a national correspondent for The Atlantic.
This article appears in the October 14, 2011 edition of National Journal Magazine.