RebelCapitalist: Financial Information for the Rest of Us | Can China Dictate or Influence U.S. Policy?

Can China Dictate or Influence U.S. Policy?

Mar 13, 2009 | By: Mr_Blue | Tags: u.s. treasury securities, china

China is the U.S. government’s largest creditor. As of December 2008, China owned $727.4 billion of U.S. Treasury Securities and even more when you factor in U.S. governmental agency debt (including Fannie Mae and Freddie Mac). China has financed our huge federal budget deficits and has provided plenty of capital and liquidity to our credit markets so that we can buy Chinese products at national supermarket chains and buy homes with very little to no down payment. China has been good to our economy and may have provided the fuel to the credit bubble we find ourselves in today. But this comes with a price - China has invested heavily in the U.S. and now they are growing concerned about their investment.

China wants assurances that their U.S. Treasury holdings are safe.

“We have lent a huge amount of money to the United States,” [Chinese Premier] Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

We’ve got a huge challenge. We need China to keep buying U.S. Treasuries in order to fund our much needed economic stimulus plan. If they stop buying we are in big trouble because that will devalue the U.S. dollar and U.S. Treasury Securities. There are rumblings in China about their investment in U.S. Treasuries:

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.

And Chinese government’s two leading think tanks have suggested that their Treasury holdings should be used as a “bargaining chip” to influence U.S. policy particularly U.S. trade policy.

So, China is in a position of power and may be able to exert leverage over us. Will they use it? I think yes because that is all they have. They cannot simply sell or dump their holding without taking huge losses and devastating their export business because they destroyed our economy. We are tied at the hip but China is in a much better negotiating position.