China slams U.S. politics, but can’t remove itself from the American economy

Rob Schmitz Jul 29, 2011
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China slams U.S. politics, but can’t remove itself from the American economy

Rob Schmitz Jul 29, 2011
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Steve Chiotakis: China’s state-run news agency said today the U.S. is being ‘kidnapped by dangerously irresponsible politics.’ That word comes as U.S. House leaders have pushed back, until today, a vote to cut the federal deficit while raising the debt ceiling.

But Marketplace’s China Bureau Chief Rob Schmitz explains despite its criticism, China just can’t stop investing in the American economy.


Rob Schmitz: China is the largest foreign-holder of U.S. debt. And this is how it works: it buys debt through the purchase of U.S. treasury bonds. And despite the doomsday worries in Washington, China has no plans to stop. The reason, says Tsinghua University economist Michael Pettis can be boiled down to its currency, the Renminbi.

Michael Pettis: They’re buying foreign assets in order to keep down the price of the renminbi. And by keeping down the price of the renminbi, they ensure that they have a current account surplus.

Ccurrent account surplus is economist lingo for trade surplus. In layman’s terms, China’s huge holdings of U.S. debt helps keep its currency artificially low. That, in turn, keeps China’s exports really cheap — so cheap that foreigners keep buying them. And that keeps Chinese people employed. This is the formula China’s economy has been based on for three decades, and Pettis says China’s trapped: the country is now a full-fledged U.S. treasury bond addict.

If it wanted to kick its addiction, Pettis says it would have to find another currency that would be able to soak up a huge amount of China’s money. The only one out there is the Euro, but look at Greece, Portugal and Spain — they don’t look stable either.

In Shanghai, I’m Rob Schmitz for Marketplace.

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