China and US locked in diplomatic dance of debt

• Source: Globaltimes
• [22:35 February 28 2010]
• Comments

Illustration: Liu Rui

By Yu Donghui

The 15th of every month is a busy time for China watchers. That's the date the US Department of Treasury releases its monthly Treasury International Capital (TIC) data, and clues can be dug up from changes in China's holdings of US Treasury securities. And they can always find something, no matter whether China increases or cuts its holdings.

On February 16, when the latest TIC data was released, people were surprised to find that China had unprecedentedly trimmed its holdings by $34.2 billion in December 2009, leaving Japan the largest holder of US debt.

Some Americans originally worried about the possible threat of China's holdings of US debt were now concerned that this was a sign of China dumping US bonds. Not long ago, in the wake of US arms sales to Taiwan, some Chinese military scholars suggested the Chinese government dump US bonds in retaliation.

Over the past two years, Americans have been trapped into two contradicting thoughts. While they were afraid that China would threaten the US, they also worry that China's dumping US bonds would lead to a slump in the dollar. They thus closely examined every slight change in China's Treasury holdings.

China's holdings of US Treasury securities increased from $60 billion in 2000 to nearly $900 billion in 2009, a fifteen-fold increase within a decade.

About 20 years ago, Americans were worried about being bought by the Japanese. These same fears have resurfaced, but this time China is in the place of Japan.

In fact, over the past years, China's huge purchases of bonds has helped the US, beset by budget deficits, keep a low interest rate and an extravagant lifestyle, something many economists point a finger at as one reason for the financial crisis. But the bond purchases have given a new life to "China threat" theory.

I covered two hearings on Capitol Hill Thursday, both of which referred to this issue.

At a House of Representatives Foreign Affairs Committee hearing, US Secretary of State Hillary Clinton pointed out that the US's heavy debt limited its diplomatic ability. "We have to address this deficit and the debt of the United States as a matter of national security not only as a matter of economics," Clinton said.

Albeit avoiding mentioning China, Clinton warned that having to rely on foreign creditors hit "our ability to protect our security, to manage difficult problems and to show the leadership that we deserve."

Meanwhile, at another hearing, Republican congressman Frank Wolf told the US-China Economic and Security Review Commission that the situation is bad for US security.

Americans are too anxious about this. Under dual pressure both at home and abroad, China's foreign exchange management authorities are indeed confronted with a dilemma.

On the one hand, China worries about US fiscal deficits. Once the US dollar is devaluated, China's huge assets in the US will be inevitably hurt.