Two weeks ago, the Hong Kong newspaper Ming Pao Daily reported China's government had expressed interest in purchasing "at least" $200 billion worth of new U.S. Treasuries, to be issued soon by Hank Paulson and Co. in order to pay for the ballooning operating expenses of the U.S. government. China already owns about 20 percent of the $2.7 trillion worth of U.S. Treasury debt held by foreign countries. So if you were wondering who was going to pay for the partial nationalization of the U.S. banking system, the answer is obvious: China.
Unlike the U.S., China's got cash to burn. The latest figures indicate that China's government has socked way $1.9 trillion in foreign reserves. The economy is slowing, but still predicted to grow at a rate of 9 percent in 2008. In September, the country recorded a $29 billion trade surplus with the rest of the world, its largest ever.
Unlike Europe or Japan or even some other big-name emerging economies such as Russia or Brazil, China has been more or less insulated from the global financial meltdown that started in the United States. China never allowed subprime mortgages and requires hefty down payments for mortgage loans, so the housing sector hasn't crumpled like a paper tiger. China already boasts a nationalized banking system, and its financial institutions haven't been huge players in the exotic derivatives markets that were all the rage in more "advanced" nations. Yes, China's stock market has been obliterated in recent months, and yes, China owns about $200 billion worth of securities issued by Fannie Mae and Freddie Mac, but so far, the shock waves that are pushing Europe and the U.S. into recession haven't rocked China.
Which presents a bit of paradox. China's relative immunity from global economic panic has put it in the position to act as rescuer of the global financial system. Some optimists have even suggested that Shanghai and Hong Kong are ready to inherit the mantle of global financial hubs from New York and London. And if China wanted to, it need not restrict itself to buying U.S. Treasuries. It could go on a buying binge, grabbing large stakes in foreign banks and other institutions desperate for capital. (Although given how China has been burned on some of its earlier forays into U.S. equities, enthusiasm for a spending spree may be limited.)
The paradoxes don't stop there. In the West, the cascading impact of the U.S. housing bust throughout multiple national economies has led some critics to question the merits of globalization. Interdependence seems to breed quick contagion. But China's leaders, even as they maintain their distance from true global economic integration, are still solidly pro-globalization, as they know that without exports they cannot maintain China's high growth rates.
Which is why China will keep buying Treasuries. China may be relatively healthy now, but the long-run prognosis is not good. The credit crunch may not be freezing the Chinese economy, but the accelerating recessions in the U.S. and Europe will cause serious harm. The collapse in consumer spending in the U.S. is bound to be reflected in declining Chinese exports. Already, commodity prices across the world are declining, in part because the Chinese appetite for raw materials is slumping. As U.S. economic growth turns negative -- a possibility viewed as a near certainty for the current fiscal quarter -- the Chinese economy is doomed to take a big hit.
I originally started paying attention, in 2005, to the unsustainability of the U.S. housing bust because it seemed clear that inflated housing values were providing the cash for American consumption, which in turn was the locomotive pulling the global economy. In the U.S. and Europe, that locomotive is out of steam. China's leaders have long promised to move the Chinese economy away from dependence on exports and toward a reliance on domestic consumption, but right now, China's consumers still only account for 30-35 percent of China's GDP (in comparison to 70 percent for the U.S.). China, too, faces a crash, and its best bet to avoid economic disaster is to ensure that the American recession is as short as possible.
Some people look at China's purchases of U.S. Treasuries and its vast dollar-denominated foreign reserves and worry that China "owns" the U.S. economy. They fear that China's leaders could destroy the U.S. by exercising the "nuclear option" of selling off dollars and refusing to subsidize the U.S. national debt. But pressing the nuclear button would be an invitation to mutually assured destruction. For now, China wants a healthy U.S., and if that means paying for a bailout, so be it.
The really troubling long-term question is what happens when recessionary conditions in the U.S. hit their nadir, and China's economy slows down to the point where Chinese financial resources must be devoted to rescuing the domestic economy, and not the profligate ways of Americans? Because it seems highly likely that in the years to come the U.S. will be forced to pour additional hundreds of billions of dollars into economic stimulus projects aimed at getting the American economy out of recession.
Who will buy that debt?