China is not the US’s Banker

Perhaps apropos of the annual “Black Friday” shopping event when many Americans will be out buying holiday gifts – many of which will have been made in China – I did a brief radio segment on AM Tampa Bay with Jack Harris and Ted Webb on the misconception that China somehow holds sway over the United States.

Here are some facts to consider:

I. China, as a practical matter, cannot simply stop buying US Treasury securities

a. Any country is constrained in terms of what they can do with foreign currency reserves. China can either:

1. hold US Dollars and earn zero return

2. sell dollars in the forex market, but they have to be careful not to move the market and devalue them, or

3. buy assets, goods or services priced in US Dollars – Treasury securities are the only market deep, liquid and secure enough to absorb that volume of Dollars, especially now that AAA paper in the private market is scarce

II. Even if they could, it would not derail the US Treasury market

a. The US Treasury securities market is $13.5 trillion

b. Two thirds of the market is held domestically – pension funds, insurance companies, investors of all types

c. China holds <$900 billion (a bit more than Japan), or ~6.5% of the total

III. China is more dependent on exports to the US than the US is dependent on imports from China

a. China total exports are 24% of GDP vs. 11% for the US

b. Exports to the US are nearly 6% of Chinese GDP, a big number and not easy to reproduce

1. US exports are actually larger than China’s – $1.5 trillion vs. 1.2

c. The US can find alternative markets for sourcing many products, especially low cost, low value added

IV. China is facing serious economic issues of its own – look back to Japan in the 1980s

a. Policies that favor export industries at the expense of domestic consumption lead to excess capacity and thin profit margins for Chinese industry

b. Negative real interest rates lead to weak banks, speculation and asset bubbles – misallocation

c. Capital markets and financial services are underdeveloped compared to Japan or the west

d. Attempts to suppress inflation economy are producing distortions – lending quotas, reserve requirements, interest rate policy


V. Financial repression in China is not sustainable in the long run, and this is what should really concern us

a. China cannot revalue easily, and must do it slowly, to avoid business contraction and rising unemployment. Chairman of the Import-Export Bank of China: “a rapid rise in the yuan would cause massive job losses and Western nations would have to be ready to accept millions of Chinese immigrants.”

b. This month announced food subsidies for the poor, in response to food inflation and shortages, attempting to head off unrest

c. As in so many economies which are heavily regulated, distortions build up and are difficult to unwind

as always, with a tip of the hat to Michael Pettis and his excellent China Financial Markets blog, and to the China Economic Research Center at the Stockholm School of Economics


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