Fareed Zakaria: China's Not Doing Us a Favor

For CNN, Fareed Zakaria writes that fears in the U.S. that will stop lending to the U.S. following the debate over the ceiling are overblown:

The economic situation between China and the U.S. is the financial version of mutually assured destruction – that cold war doctrine of nuclear deterrence. If you destroy me, I will destroy you.

Let me explain. I’ll start with the facts. China is indeed ’s biggest foreign lender – it owns about 1.2 trillion dollars of debt – more than Japan, the UK and Brazil.

A little-known fact is that most of America’s debt – 14.3 trillion and counting – is owned by Americans in Social trusts, pension funds, and by the Federal Reserve.

But it is the marginal buyer that , so China is important. Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds. This is a huge hypothetical – but let’s play out the disastrous chain of that would happen if China began to divest.

It would trigger panic selling of the dollar. That would in turn hurt the , which is China’s number one export market (not a good idea if you are the Beijing government trying to keep occupied in factories across China).

China is addicted to a strategy of export-led growth, which requires that it keep its goods cheap. This means keeping its undervalued. That’s why it buys dollars.

Open popup

Welcome back!

CDT is a non-profit media site, and we need your support. Your contribution will help us provide more translations, breaking news, and other content you love.