February 4, 2010

AMERICANS DON'T BUY CHINESE DEBT:

HOLMES: When China rules the world? Sorry, not likely (Kim R. Holmes, 2/04/10, Washington Times)

China's economy is as large as it is because it has well over a billion people, not because it has unlocked any great secret to economic prosperity. Its economy remains largely closed, as indicated in its abysmal ranking of 140 out of 179 countries graded on this year's Heritage Foundation/Wall Street Journal Index of Economic Freedom. Its undervalued currency, state-controlled export policies and closed domestic economy are wholly out of step with what truly makes a global economic leader - namely, economic liberalization.

Nor should we fear China's ownership of U.S. debt. As my colleague, Derek Scissors, explains, there is little danger that China will be able to control America's economy. Official Chinese holdings of Treasuries amount to less than 7 percent of U.S. Treasury debt. That's a lot of money, unfortunately, but it's hardly enough to exercise control.

Not only that, China's ownership of our debt is actually a sign of dependence on us, rather than the other way around. The Chinese have no choice but to buy U.S. bonds, because ours is the only market sound enough and big enough to park their excess funds. Since China's currency is tightly controlled, they can't spend those dollars on their own economy. They invest even more in the U.S. economy, thus funneling billions of dollars we spend on Chinese goods right back to us.

If anything, China's investment in U.S. bonds reflects domestic weakness. If Beijing's economy were freer, the Chinese could invest in their own economy instead. But they know this is bad idea under current conditions. China's authoritarianism is like a yoke around its own neck. It both fosters investment in the U.S. economy and blocks domestic reforms that would enable China to compete in an open economic sys

Posted by Orrin Judd at February 4, 2010 6:26 AM
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