United States should be worried with China becoming number two of the world in economy?

[diablo234]

Who cares if the US is #2, #3, or #4.

As China and other companies gain wealth US companies such as GM, Ford, Apple, Dell, etc have a chance to gain marketshare overseas helping our economy in return.

[Remolino]

The problem with marketshare is if GM, dell and the other companies decide it would be best to manufacture most if not all there products entirely in China instead of importing it from the US. Then what if those companies decide not to bring back to the US most if not all of the profits they made in China. And what if those nations have tax laws which make it too costly for the US companies to bring back profits to the US. Remember, many of those companies are only interested in increasing profits every year. If being patriotic affects there profit they might think twice about bringing profits back to the US.

Edit - Found out GM exports to China $900 million in auto parts. So that is good even though selling the finished car from the US would have been better for GM US division. But chances are in the future it will probably be cheaper for them to produce the parts in China.

[ssiguy2]

I don't know how you can say "only" $800 billion.
China is still very much a developing country and the fact that you owe such a huge amount to a country that couldn't even feed it's 30 short years ago.
Also it is true that China is starting to cash in some of it's US chips but that is also bad news as it indicates a lack of confidence in both your economy and monetary system/unit.
Russia, France, China, and Saudi Arabia got together last year and discussed the possibility of changing oil prices out of US$. If the US looses it's "reserve currency" status the implications on your economy would be nothing short of disasterous.

[cajun504]

NATO pays for the Swisses defense.

[Kensingtonian]

Ya, who cares. I live in Canada which has never been number one at anything and life here is pretty sweet.

[Shawn]

Originally Posted by ssiguy2

I don't know how you can say "only" $800 billion.

It could be $8,000,000,000 billion and it wouldn't make a difference. The amount doesn't matter here, because China can't just "call in" its debt. The "debt" we're talking about is in the form of T-bonds, and Treasury securities have a fixed term of maturity. Treasuries are sold at a discount and pay face value at the maturity date. China's holdings do not mature all on the same day.

Put aside the fact that over 75% of US debt is owed to Americans themselves, put aside that out of foreign-held debt, China owns only about 20% (meaning China owns less than 5% of the total US debt). And put aside that as a percentage of GDP, there are a host of other states out there in far worse debt problems than the US (check out Japan if you want to see a place that's actually screwed).

If China tried to sell all of their US securities in one day, they would face an adverse price response; they'd necessarily be selling at a loss. That would hurt China far worse than it would hurt the US. Furthermore, since the Fed holds ten times as many securities as China, they could easily offset the entire impact by a counter-strategy.

Beyond this gaping hole in the "China can bring the US to its knees by recalling debt!" line of thinking, there's the big fact that "China" isn't just the Party in Beijing. China's Central Bank owns about 63% of all Chinese-held US treasury holdings. The other 37% is held by Chinese institutional investors. The government is holding these reserves in order to hold down the value of their currency. Keeping the yuan artificially low is the most important cog in the Chinese economic engine; if the yuan were to freely float on the FX markets, Chinese exports would become prohibitively more expensive almost overnight. "Cashing in" on US debt would kill this monetary strategy and torpedo growth. And delivering on continual economic growth is really the way the Party believes it can maintain control over the country. There's just no way the Party would scuttle its own most important governing tool.

The Chinese institutional investors, on the other hand, are holding them as a safe and sound investment, and certainly won't be "calling in" before maturity - they'd lose money.

The US has traded "China" little pieces of paper in exchange for goods, mostly computers, computer parts, and toys. We pay interest on those pieces of paper with more pieces of paper. If China wants any real benefit from all that paper, it must eventually BUY AMERICAN GOODS or INVEST in the American economy. Either way, those dollars will come back to the US to help its economy.

But international political economy and the interdependence of the currency markets and central bank debt solicitation aren't sexy, certainly aren't scary, and don't make for good headlines. "When China recalls its debt, the US is fuuuucked" plays much better to both the domestic and international press.

[Restless]

Couple of points:

1. China can't call in the debt, but unloading $1trillion of debt and another 1$trillion in other assets into the market would probably trigger a stampede out of any dollar-denominated asset and into other currencies. It's not in anyone's interest for this to happen.

2. A debtor nation (like the US) is always more vulnerable than a creditor nation (like China). China could actually write off all those US assets, as domestic demand and savings will be enough to continue propelling the Chinese economy. On the other hand, the US doesn't save enough, so relies on other countries to finance the domestic economy.

3. Dollars don't actually have to go back to the US, as lots of people are happy to hold them. But if the US doesn't get a handle on the budget deficits and trade deficits over the next few years, people are really going to question those "pieces of paper". China has publicly questioned their value and Pimco (with its $1trillion in assets) has shocked everyone by dumping every single treasury bond in their main bond fund.

Originally Posted by Shawn

It could be $8,000,000,000 billion and it wouldn't make a difference. The amount doesn't matter here, because China can't just "call in" its debt. The "debt" we're talking about is in the form of T-bonds, and Treasury securities have a fixed term of maturity. Treasuries are sold at a discount and pay face value at the maturity date. China's holdings do not mature all on the same day.

Put aside the fact that over 75% of US debt is owed to Americans themselves, put aside that out of foreign-held debt, China owns only about 20% (meaning China owns less than 5% of the total US debt). And put aside that as a percentage of GDP, there are a host of other states out there in far worse debt problems than the US (check out Japan if you want to see a place that's actually screwed).

If China tried to sell all of their US securities in one day, they would face an adverse price response; they'd necessarily be selling at a loss. That would hurt China far worse than it would hurt the US. Furthermore, since the Fed holds ten times as many securities as China, they could easily offset the entire impact by a counter-strategy.

Beyond this gaping hole in the "China can bring the US to its knees by recalling debt!" line of thinking, there's the big fact that "China" isn't just the Party in Beijing. China's Central Bank owns about 63% of all Chinese-held US treasury holdings. The other 37% is held by Chinese institutional investors. The government is holding these reserves in order to hold down the value of their currency. Keeping the yuan artificially low is the most important cog in the Chinese economic engine; if the yuan were to freely float on the FX markets, Chinese exports would become prohibitively more expensive almost overnight. "Cashing in" on US debt would kill this monetary strategy and torpedo growth. And delivering on continual economic growth is really the way the Party believes it can maintain control over the country. There's just no way the Party would scuttle its own most important governing tool.

The Chinese institutional investors, on the other hand, are holding them as a safe and sound investment, and certainly won't be "calling in" before maturity - they'd lose money.

The US has traded "China" little pieces of paper in exchange for goods, mostly computers, computer parts, and toys. We pay interest on those pieces of paper with more pieces of paper. If China wants any real benefit from all that paper, it must eventually BUY AMERICAN GOODS or INVEST in the American economy. Either way, those dollars will come back to the US to help its economy.

But international political economy and the interdependence of the currency markets and central bank debt solicitation aren't sexy, certainly aren't scary, and don't make for good headlines. "When China recalls its debt, the US is fuuuucked" plays much better to both the domestic and international press.

[Cal_Escapee]

Considering China has over 3 times as many people as the US, I'm unimpressed. Wake me up when their per capita GDP is in the top 5.

[Cal_Escapee]

Originally Posted by Restless

Couple of points:

1. China can't call in the debt, but unloading $1trillion of debt and another 1$trillion in other assets into the market would probably trigger a stampede out of any dollar-denominated asset and into other currencies. It's not in anyone's interest for this to happen.

Your last sentence says it all. This would hurt China as much or more than it would hurt the US, starting with the loss of a large part of $2 trillion (using your figures) since nothing like this amount could be sold without moving the market. Then, of course, there's the question of what they would do with the money (which would be in dollars). There is simply no other currency that they could exchange that amount for and even if they could, again they'd take a huge loss.

2. A debtor nation (like the US) is always more vulnerable than a creditor nation (like China). China could actually write off all those US assets, as domestic demand and savings will be enough to continue propelling the Chinese economy. On the other hand, the US doesn't save enough, so relies on other countries to finance the domestic economy.

J.Paul Getty, once I believe the world's richest man, famously said, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." The US debt held by the Chinese is at least as much their problem as the US's. Whether or not the US saves "enough", we could cope with an orderly movement of the Chinese out of US debt. As part of its "qualitative easing" program to combat the recession, the Federal reserve bought over $2 trillion worth of debt. If necessary, it could buy the debt held by China. This would involve in effect "printing money" and would have some degree of inflationary risk but it could be done. In fact, some economists argue that inflation need not be a matter of grave concern when there is unused productive capacity in the economy as there is now---Bernanke makes this case. I won't argue the point--I'm simply saying we could cope with the Chinese selling their treasury debt holding but I'm not sure they could.

3. Dollars don't actually have to go back to the US, as lots of people are happy to hold them. But if the US doesn't get a handle on the budget deficits and trade deficits over the next few years, people are really going to question those "pieces of paper". China has publicly questioned their value and Pimco (with its $1trillion in assets) has shocked everyone by dumping every single treasury bond in their main bond fund.

You make this all sound so logical and simple. Neither of the last 2 chairmen of the Federal Reserve, both of whom are PhD economists, have been able to understand why US long term rates were as low as they were. And Greenspan famously told everybody to dump their 30-year fixed mortgages in the 1990s and go get variable rate ones (the kind that have caused such havoc) to save money. Personally, I have been expecting long rates to rise for at least a decade. It hasn't happened and I can't explain it (it has cost me a bundle).

Then there are the Japanese. Japanese long rates are among the lowest in the world (close to zero), yet the Japanese debt as a percentage of GDP is the highest--200%. And don't tell me its because Japanese are savers--they are, but their nation is still on the edge of becoming a debtor nation like the US.

Yeah, the Chinese have questioned the value of the US currency. I call that "politics". They kept buying bonds denominated in that currency and show no signs of stopping because they really don't have much choice. As for Bill Gross (PIMCO), you have to distinguish between his actual moves based on fairly short-term expectations and his pronouncements about the longer term. Yes, he has produced some dire warnings about the US debt picture for the longer term and it's hard to disagree with him. But those warnings have been applicable for a number of years and during those years he has been a buyer of treasury debt for a number of them because he say it as rising in the shorter term. Right now, almost every investor would tell you interest rates are likely to rise as the economy comes out of recession and even a rise of 50 basis points (0.5%) would mean billions of dollars in losses at Gross's giant Total Return Fund. This move has to be seen as distinct from his view for the longer term.

[Restless]

1. I think it'd hurt the US more than China.

China loses much of the foreign currency savings that it has built up, but that doesn't really affect China's continued domestic growth. On the other hand, the US doesn't have any savings to fall back upon, and would face declining living standards as foreigners and domestic investors would be unwilling to fund THE ongoing spending and trade deficits.

2. I agree the US could buy and absorb the $2trillion in dollar assets that China holds. The problem is the other trillions owned to other countries, and the future trillions that the US will owe to foreigners.

3. The question is how high interest rates will go up. Given the huge liabilities already incurred and that will be incurred, nobody is optimistic. Just look at how low interest rates previously were in certain European countries. Then everyone realised that there was no way they'd be able to pay back their debts...

[Cal_Escapee]

Where is the unique US problem here?


Source: http://online.wsj.com/article/SB1000...=ITP_pageone_1

This is not the situation now but the projected situation in 2015 when it will be worse than now. But by then, the US, while in slightly worse shape than the major European countries, is not terribly different. And Japan is in the worst shape of all, now and in 2015, yet has about the lowest interest rates (and, as I said, by 2015 Japan is also likely to be a net debtor since even its high savings rate can't keep up with its spending).

[Cal_Escapee]

In the middle of all this "OMG the US owes China so much money" hysteria, let's be clear on one thing--China has problems of its own:

Actually, Chinese Debt-To-GDP Is Enormous, And Regional Governments Need The Real Estate Bubble To Stay Solvent
Joe Weisenthal | Feb. 11, 2010, 6:12 AM

Victor Shih, a professor at Northwestern University who specializes in China warns that the country has only achieved its blistering GDP growth through massive leverage on a scale nobody currently appreciates.

Here's what he wrote in an op-ed in WSJ Asia in regards to figure out the true level of provincial, local debt:

What does this mean in practice?

If true, these are extraordinary numbers. Of all the problems China is thought to have, high public debt in not considered one of them. But if a real estate bust triggered a wave of regional government insolvencies (which obviously would have to be bailed out by Beijing), the problem of public debt could be significant . . . .

Source: http://www.businessinsider.com/actua...siness+Insider)

"If a real estate bust triggered a wave of . . . insolvencies . . . ." Sound familiar?

[Restless]

Originally Posted by Cal_Escapee

In the middle of all this "OMG the US owes China so much money" hysteria, let's be clear on one thing--China has problems of its own:


Source: http://www.businessinsider.com/actua...siness+Insider)

"If a real estate bust triggered a wave of . . . insolvencies . . . ." Sound familiar?

You're right that China's debt is a lot higher than the 30% held directly by the central government. But remember that China's economy will most likely increase in size by 4x in the next 10years and that annual spending deficits are very modest (circa 3%). Plus, the real estate system is rigged by the government and there are more than enough people to occupy every single empty apartment. However they currently can't afford to buy.

In contrast, the IMF estimates that sustainable US government spending requires a "permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP".

Part of this is caused by large unfunded social security commitments that have been kept off the official budget

Rough speaking, federal taxation would need to double to meet all the spending commitments that have been made so far.

[milquetoast]

And that ain't gonna happen.

[Brumtonian]

The US is still the worlds largest manufacturer. If you are worried about a Chinese 'threat' take a look at their gdp per capita compared to yours. Also note their hdi rating compared to yours, and their foul human rights and democratic record, you have nothing to fear America

[Brumtonian]

Also note the prevelance of American culture taking hold in China. There is a mcdonalds in all the cities, big billboards are everywhere, they wear western clothes... etc the list goes on.

[Martinman]

Originally Posted by Restless

Couple of points:

1. China can't call in the debt, but unloading $1trillion of debt and another 1$trillion in other assets into the market would probably trigger a stampede out of any dollar-denominated asset and into other currencies. It's not in anyone's interest for this to happen.

2. A debtor nation (like the US) is always more vulnerable than a creditor nation (like China). China could actually write off all those US assets, as domestic demand and savings will be enough to continue propelling the Chinese economy. On the other hand, the US doesn't save enough, so relies on other countries to finance the domestic economy.

3. Dollars don't actually have to go back to the US, as lots of people are happy to hold them. But if the US doesn't get a handle on the budget deficits and trade deficits over the next few years, people are really going to question those "pieces of paper". China has publicly questioned their value and Pimco (with its $1trillion in assets) has shocked everyone by dumping every single treasury bond in their main bond fund.

Thank You for putting this so clearly. Its unfortunate that so much of the country refuses to even acknowledge the severity of our debt problem simply because the current President has a (D) next to his name. That in itself is the real looming issue facing this country, not China.

[milquetoast]

If we can have Ryan knock off 4 Tril in 10 years, we might have a shot ...

[Restless]

Originally Posted by Brumtonian

The US is still the worlds largest manufacturer. If you are worried about a Chinese 'threat' take a look at their gdp per capita compared to yours. Also note their hdi rating compared to yours, and their foul human rights and democratic record, you have nothing to fear America

China is actually the world's largest manufacturer again:

China noses ahead as top goods producer
http://www.ft.com/cms/s/0/002fd8f0-4...#axzz1IZPCHSY6

By Peter Marsh in London
Published: March 13 2011 22:22 | Last updated: March 13 2011 22:22

China has become the world’s top manufacturing country by output, returning the country to the position it occupied in the early 19th century and ending the US’s 110-year run as the largest goods producer.

The change is revealed in a study released on Monday by IHS Global Insight, a US-based economics consultancy, which estimates that China last year accounted for 19.8 per cent of world manufacturing output, fractionally ahead of the US with 19.4 per cent.

Full article available on the Financial Times link above

===

I think the USA doesn't have any to fear either, as they will probably remain one of the world's most dynamic and richest economies, even when China becomes a developed nation.

[Restless]

Originally Posted by Brumtonian

Also note the prevelance of American culture taking hold in China. There is a mcdonalds in all the cities, big billboards are everywhere, they wear western clothes... etc the list goes on.

That is a pretty superficial overlay on top of the core cultural values...

You could say the same of Chinese food which is available in every village in the US (and the UK for that matter). LOL