It certainly didn’t hurt the market today to get a reassuring statement from Beijing saying its large holding of foreign reserves was not “a nuclear weapon” and the more than $900 billion in U.S. Treasury debt “should not be politicized.” In other words, the idea that China would use these as a “threat” is false.
For years, one doomsday scenario has had China dumping its dollar reserves and refusing to buy more Treasuries, as well as corporate debt, sending the global economy into a tailspin and over-leveraged America into a Depression. (A cynic might say, we’ve been doing a fine job of that on our own). But the apocalypse storyline has one big flaw: Such a move would prove just as devastating to China.
For one thing, China’s holdings are a critical state investment. The last thing Beijing wants to do is see their value fall, even on the perception that our friendly Chinese bankers might cut us off at the bar and confiscate our keys. Their Treasuries have done well as the world has rushed to them as a safe haven lately. The historic imbalances between the two countries have been, perhaps, short-term benefits for both, allowing China’s rapid growth and America’s cheap imports (but also unsustainable bubbles). In the long term, they are dangers to both countries.
The other reason that China has skin in the game: America remains the most important market for its export-dependent economy. A few years from now, China may not need American customers as much. But for now, a sputtering American recovery will mean trouble for Chinese exporters.
It’s naive to believe China’s role as America’s big lender doesn’t constrain our foreign and economic policies. And the economic competition between the two is very real and will grow in the future, especially over oil, raw materials and precious earth metals. But both countries desperately need each other.
It is interesting that Beijing chose to make this statement now. Make of it what you will.
Today’s Econ Haiku:
Only one for five
Jobs, that is, per unemployed
See, we’re just lazy