NYT Falls For China Banker Fallacy
Covering President Barack Obama’s trip to China a Helene Cooper, Michael Wines, and David Sanger by-lined piece in the November 14th New York Times begins:
When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.
That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.
China is our largest foreign lender, but calling them our banker ignores the fact that they have little choice but to buy our bonds. Thanks to the imbalance in trade between our countries, every year China is left with about $250 plus billion worth of U.S. dollars. So what choice do they have in how to spend those dollars? As Heritage fellow Derek Scissors explains, not much:
Beijing has set up a system whereby (1) money can’t flow freely in and out, and (2) China’s central bank–the People’s Bank–must buy dollars from whoever wants to sell. Say the Chinese government gives 100 billion in dollars to the Ministry of Education to improve schools and the Ministry sends that money out to the provinces. Schools can’t use dollars to pay teachers or construction workers because those people use yuan to buy food, clothes, and so on. Individuals can’t even, by law, send dollars to another country.
Whoever ends up with the dollars will want yuan. Who gives them the yuan? You got it: the People’s Bank, which buys back the dollars it just gave away. The People’s Bank must, by law, buy all dollars it is offered. So nearly all dollars end up right back where they started. Nobody seems to quite believe this, especially inside China. Poor Yi Gang, People’s Bank deputy governor, has to repeat every month that reserves must “unavoidably” or “inevitably” be invested outside the P.R.C.
Now, “outside the P.R.C.” still seems to leave Beijing a lot of investment options. Here’s where the sheer amount of dollars comes in: It’s very hard to find places to invest all that money. For example, China already has bought more oil than it can store and there’s not enough gold available on the planet to buy with just a year’s worth of China’s trade surplus.
The only market open to the P.R.C. and big enough to absorb its dollars is our bond market. That’s why China has at least $1.1 trillion, and maybe as much as $1.7 trillion, already invested in American bonds. That’s why China moved $200 billion into U.S. Treasury bonds last year, even though the interest rate was dropping like a stone. Beijing knows it has no real choice, even if it’s very useful to pretend it is America which has no choice.