U.S. Debt Made in China

China’s holdings of U.S. property and U.S. securities have increased due to our low savings rate, out of control deficit spending, and progressive laws that allow foreigners to purchase massive assets in our country.

Our economy now depends heavily on capital inflows from other countries, particularly China, Japan, United Kingdom, and oil producing nations, in order to meet domestic investment and to fund the exponential federal budget deficit growth.

The willingness of foreigners to buy U.S. debt, in spite of the downgrade of our sovereign credit rating from AAA to AA+ by Standard and Poor’s in August 2011, helped keep interest rates low in conjunction with the Fed’s monetary policy decisions. (China’s Holdings of U.S. Securities: Implications for the U.S. Economy, Wayne M. Morrison and Marc Labonte, CRS Report for Congress, December 6, 2012)

The Chinese government controls the appreciation of its currency against the dollar and other currencies traded daily, enabling China to become the largest and fastest growing holder of foreign exchange reserves. Since the world reserve currency is the U.S. dollar, China is the largest holder of U.S. dollars, the largest holder of long term Treasury debt, U.S. government agencies debt, corporate debt, equities debt, and short-term debt. China held $1.73 trillion in U.S. securities in 2011; of this total, $1.16 trillion were Treasury securities. (www.crs.gov)

Wansiang America, of the Chinese parent company manufacturing auto parts, purchased A123 Systems for $256.6 million, its plants in U.S. and China, its contracts with grid storage utilities, and contracts with automakers for electric and hybrid car batteries.

Wansiang outbid Johnson Controls, Siemens, and Japan’s NEC. However, the Ann Arbor, Michigan plant of A123 Systems was purchased by Navitas System of Woodbridge, Illinois, for $2.25 million. Navitas Systems “provides energy storage products for commercial, industrial, and government agency customers.” (Bloomberg News as quoted in Washington Post, Dec. 2012)

According to the Washington Post, the battery maker A123 Systems had received $133 million in Energy Department stimulus grants under the American Recovery and Reinvestment Act of 2009 and thus the Chinese should not benefit from technology developed with taxpayer dollars. The Energy Department defended the grant money as stimulus job creation, not technology development. (http://www.washingtonpost.com/business/economy/chinese-company-buys-battery-maker-that-got-recovery-funds/2012/12/09/9f35a4fc-4240-11e2-8061-253bccfc7532_story.html)
“This is the latest in a seemingly continuous cascade of predictable, super-sized clean-technology commercialization failures, which unfortunately hemorrhages our critical national technology and intellectual property advantages to the Chinese and other economic competitors.” (Andy Karsner, former assistant energy secretary under President George W. Bush as quoted in the Washington Post)
Congressmen were publicly concerned about the size of Chinese holdings of U.S. government debt yet have done little to stop it. If China would decide to sell U.S. holdings, others would follow suit and the massive selloff would destabilize the U.S. economy. Could China use its large holdings of U.S. debt as a bargaining chip on economic, technology, or military issues?
“The conference report accompanying the National Defense Authorization Act of 2012 (H.R. 1540, P.L. 112-81) included a provision requiring the Secretary of Defense to conduct a national security risk assessment of U.S. federal debt held by China.” (Wayne M. Morrison and Marc Labonte, CRS, RL 34314)
China has openly criticized U.S. fiscal and monetary policies in particular the Quantitative Easing by the Federal Reserve that temporarily injected cash into the economy. Newly created money (read printing or electronic/out of thin air) purchased financial assets from banks and private institutions in pre-determined amounts. The $2 trillion in Treasury bonds the Fed bought in QE1 and QE2 will be difficult and painful to sell because it will drive up interest rates and the cost of borrowing for both consumers and businesses. QE3 (announced on September 13, 2012) bought $40 billion each month in mortgage-backed securities from Fannie Mae and Freddie Mac until the job market improved – more U.S. debt accumulation.
The argument is that QE causes inflation, weakens the dollar, and thus reduces the value of China’s debt holdings. Chinese policy makers have suggested that China divest away from the dollar and diversify into other currencies. Other Chinese economists demanded appreciation of the Chinese Yuan, lessening the need to hold U.S. dollars or assets.
Some analysts believe that China has no leverage against the U.S. as long as it keeps the value of the Yuan low – it has to buy more U.S. dollars and assets. If a massive selloff of debt holdings occurs, negative economic waves from the U.S. would hit the global economy and China’s exports while American buying of Chinese made goods would diminish greatly.
I am not trying to be pessimistic, just a realist, however, at the rate we are selling off or moving manufacturing to China or to other places around the globe and investing in the economies and infrastructures of emerging nations, we may be in a position of total inability to produce basic consumption goods in our own economy to satisfy internal demand. Our own infrastructure is crumbling and needs updating, we must stop re-distributing our wealth to ungrateful foes.
No matter what the pro and con arguments coming from various economists, lobbyists, and Congressmen, the question must be asked, how long can we support our economy by constantly borrowing money from other nations, particularly those who are not our friends? How much longer, to use a term dear to progressives, is our borrowing “sustainable?” What if creditors, the biggest threat to our existence, demand payment and are determined to get it by any means necessary and possible, including confiscation and military force?

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