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Econwatch
March 13, 2009 4:53 PM

If China Stops Lending Us Money, Look Out

By
Declan McCullagh
Topics
Regulation
(AP Photo/Greg Baker)

Caption: Chinese Premier Wen Jiabao, who is "worried" about U.S. debt


If your boss slashes your pay, if you have no savings because you spent more than you earned for many years, and if your creditors are threatening to cut off your credit cards and home equity loan, what happens?

The answer, of course, is that you're in serious trouble. And this could be the situation for the U.S. government -- which is facing lower income tax receipts and ballooning deficits -- if China loses its appetite for extending more and more loans by buying U.S. Treasury securities.

China is the single largest foreign holder of U.S. Treasurys. The money it lends to the Feds finances our significant budget deficits. (Americans have been paying about $450 billion a year in interest on the national credit card; without that debt to pay off, personal income taxes could be almost 40 percent lower.)

But in Beijing on Friday, Premier Wen Jiabao told reporters that he was worried about the U.S. becoming something of a, well, deadbeat. "We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

What China's premier may be worried about is the possibility of the U.S. running up so much debt -- the projected 2009 deficit is $1.75 trillion -- that it may not be able or willing to pay it back without devaluing the currency. (If that happens, hello, inflation!)

For its part, the White House tried to reassure its Chinese creditors. Spokesman Robert Gibbs said Friday afternoon: "There's no safer investment in the world than in the United States."

It's unlikely that China would dump its Treasurys; for one thing, substantial sales would depress prices of the rest of its portfolio. The Wall Street Journal suggests that the gold market isn't large enough to represent a viable option, and "it's not clear, meanwhile, that euro, or yen-denominated debt is any safer, more liquid, or profitable than U.S. debt -- key criteria for China's leadership."

But China could reduce or halt future purchases. A less ravenous appetite for Treasurys is already evident: a New York Times article in January was titled: "China Losing Taste for Debt From U.S." One reason for fewer purchases would be diversification. Another would be to divert money toward its own 4 trillion yuan ($586 billion) stimulus package.

Reduced demand for Treasurys would drive up U.S. interest rates, probably pushing down home prices even more than they've already fallen, and also could start a run on the dollar.

This is why Secretary of State Hillary Clinton pleaded with the Chinese government last month to keep the loans flowing to Washington, D.C. ("So by continuing to support American Treasury instruments, the Chinese are recognizing our interconnection.")

This is also why, at least in part, U.S. taxpayer dollars were used to bail out Fannie Mae and Freddie Mac last year. A Business Week article says that foreign bankers were worried, especially China, which owned around $376 billion of Fannie and Freddie debt. "Treasury saw foreign governments getting the willies," a Senate aide told the magazine.

Which makes the recent flap between a U.S. Navy surveillance ship and three Chinese ships (including two fishing vessels) in the South China Sea more inexplicable than usual. Given their intertwined economies, both countries need each other more than usual right now.

  • Declan McCullagh is the chief political correspondent for CNET. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.

Add a Comment See all 31 Comments
by mjohnsona2 May 8, 2009 8:22 AM EDT
I think America is in for harder times than we have now. I speak my words with hopes that I am wrong, but reading the above article including many other articles on the economic future of our country make me conclude that America's best days are gone.

We as people failed to hold our government accountable to the ideas that the founding fathers espoused. I often read George Washington's Farewell Address. The point of his address, in my opinion, served as a future message to future generations on some of the things to avoid.

The idea that bothers me is concept of foreign debt. America is enslaved because of our foreign debt, and the inability to pay off its debts force our country into a place that we are no longer the leaders of the free world. Our foreign debt has forced us to surrender jobs to outsourcing, forced us to shift from a manufacturing society to a consumer society, and forced us to become soft materialistic people who lack the backbone and fortitude to survive difficult times.

My intent is not to condemn our country rather I hope to sound the alarms of understanding because our country can not go on with its future path for forever.

We MUST START BY saving and start paying off our debt NOW.

I think the strength of our country can be determined by its morality and spiritual values and how it handles money. Please pray for our country.
Reply to this comment
by Professor2U May 2, 2009 11:50 PM EDT
Stupid Bush should be sent to Guantanamo!!! Send him a message.
Reply to this comment
by wcreader March 17, 2009 12:52 AM EDT
Re-send: For US, working together with countries like China will allow fast recovery of the world economy; enable many men and working women, many head of the house to earn enough income to feed their family. We often heard from western media on how many we import from China, yet we seldom hear, our media in reporting how much, yet it is very true that, China has brought many US products. It is very sad. For win-win, the key is to working together with respect. Thus, it is important for a few politician, many bias local media, and the hawk team from the US military to do stop those unreal, demonize negative reporting soling aiming at just to make political attack for the competitors; to stop hawk spying act that has post a real national threat to other country; Instead to work together and lead other country to work for the common well of all.
Reply to this comment
by wcreader March 17, 2009 12:48 AM EDT
For US, working together with countries like China will allow fast recovery of the world economy; enable many men and working women, many head of the house to earn enough income to feed their family. We often heard from western media on how many we import from China, yet we seldom hear, our media in reporting how much, yet it is very true that, China has brought many US products. It is very sad. For win-win, The key is to working together with response. Thus, it is important for a few politician, many bias local media, and the hawk team from the US military to do stop those unreal, demonize negative reporting soling aiming at just to make political attack for the competitors; to stop hawk spying act that has post a real national threat to other country; Instead to work together and lead other country to work for the common well of all.
Reply to this comment
by TPS2 March 15, 2009 3:21 PM EDT
Whose bright idea was it to allow this incredible trade imbalance with China and allow it to mushroom out of control for so long, this had to be allowed under Republican Bush who was President for 8 years! Another Bush financial disaster than will be blamed on Obama who has only 55 days in office.
by cbsantispin

Last fall the United States signed the agreement to bring China into the WTO, on terms that will open its market to American products and investment. When China concludes similar agreements with other countries, it will join the WTO. But for us to benefit from that we must first grant it permanent normal trade relations (PNTR) - the same arrangement we have given other countries in the WTO. I submitted legislation to Congress to do that, and I again urge Congress to approve it as soon as possible.
DLC | Blueprint Magazine | June 1, 2000
America's Stake in China
By President Bill Clinton

Right you are Chucko, it was Bush!
Reply to this comment
by wardoglrs March 15, 2009 2:27 PM EDT
The best action for the United States and the rest of the world would be a massive act of peaceful civil disobedience. Stop paying mortgages. Stop paying credit card bills and student loans. It's over. The money you spend now will be money that you wish you had saved (or converted into land, gold, or something of value) Stop paying taxes. And don't give back your keys. Take your homes back and stop funding the government. Take care of yourselves. Do what you have to do to survive because this is your right as a human being. You are not responsible for Wall Street. You are not responsible for any of this. It's collapsing. Don't let them control the outcome. Don't give away your power. Don't give away what few resources you have left to those who created this.
Reply to this comment
by cbsantispin March 15, 2009 2:37 AM EDT
Whose bright idea was it to allow this incredible trade imbalance with China and allow it to mushroom out of control for so long, this had to be allowed under Republican Bush who was President for 8 years! Another Bush financial disaster than will be blamed on Obama who has only 55 days in office.
Reply to this comment
by SomeRandomDude March 14, 2009 6:37 PM EDT
We don't want China to quit lending! We don't want to not pay the debt!

Our economy is very unstable at the moment, and we need all the capital we can get. If we don't pay the debt, no one will make business transactions with the USA, the Euro will replace the dollar as the world currency, and we WILL have a depression. Half our jobs are working under a foreign company, or making goods to be used by foreigners.

What I would like to know is, how we are going to pay this debt? i would like an article on this topic, or maybe an Obama speech. I bet he won't talk about it until immediately after he gets elected a second time.
Reply to this comment
by bumpedoff March 14, 2009 6:25 PM EDT
China would love to put obama in the trick bag
Reply to this comment
by mrthinker1 March 14, 2009 4:48 PM EDT
Hey 74blaster, I don't think you get it. Bush was too liberal and that bothers conservatives. He ran up the debt by signing all kinds of spending bill that the liberal republican party co-sponsored.

Now, we have Obama that is even more liberal. So all the conservitive movement gets when they demand fiscal responsibility is an answer that justifies Obamas spending spree by saying bush started it. Liberals justify Obamas spending spree by saying that bush went on a spending spree first.

Its like two children pointing the finger saying I just did it becuase he started it.

Get it. Obama and the dems cannot say that its ok to borrow our future away because George Bush did it first.

Two wrongs don't make a right.
Reply to this comment
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