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China’s View of America and Europe’s Debt and Their Efforts To Get It Under Control

Illustration by Edel Rodriguez (Source: www.thedailybeast.com)

With America’s latest market crash, the debt debate seems so ‘last week’ (hey, it was last week!), there is still much to learn from the tumultuous process. Niall Ferguson attempts to provide an outside perspective on the whole debt limit battle. It’s a pretty important outside perspective too; China:

Viewed from Beijing, it looked very different. Indeed, it’s hard to imagine what more we could have done to vindicate the Chinese Communist Party’s position that Western democracy is a form of institutionalized chaos to be avoided by all sane Asians….

The antics of American legislators take on a new significance when you realize how our leading creditor interprets them. As Beijing sees it, the last three months have furnished ample evidence that—regardless of what the American rating agencies may say—the United States is no longer creditworthy. Even if Congress has pulled back from the brink of outright default, many in China view the debt deal as at best a temporary fix. As the Xinhua News Agency put it, the 11th-hour deal has “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.” Meanwhile, the unspoken intention of the Federal Reserve is to debase the dollar through “quantitative easing,” which translates into Mandarin as “printing money.”

We all know that China is not just a spectator in America’s budget battles, but a key constituency. Ferguson details China’s skin in our game:

According to official figures, mainland China holds $1.1 trillion in U.S.-government debt instruments. But it’s an open secret that the Chinese authorities also like to buy Treasuries via intermediaries in London, Hong Kong, and elsewhere. Add the U.K. and Hong Kong figures and the total is closer to $1.6 trillion—about 17 percent of the federal debt in public hands. And if you include nongovernmental securities held in China’s international reserves, the U.S. debt to China rises to more than $2 trillion.

In that math one can see a rising power. In this math, provided by Robert Samuelson, can be seen a troubled, possibly falling power:

Europe represents about one-fifth of the world economy and buys about a quarter of American exports. While Europe’s debt crisis was confined to a few small countries, they could be rescued; other European countries supplied loans to substitute for the credit denied by private lending markets. In 2010, Greek, Irish and Portuguese government debt totaled about 640 billion euros (about $910 billion), less than 7 percent of the 9.8 trillion euros of debt of all members of the European Union.

 With Spain, Italy and possibly France now under financial assault, the situation changes dramatically. There are more debtor nations and more debt at risk. In 2010, Italy’s debt was 1.8 trillion euros; Spain’s 639 billion euros; and France’s 1.6 trillion euros. But there are fewer countries that can support a rescue; and some of them have heavy debts. Even Germany’s ratio of debt-to-gross domestic product (GDP), a measure of debt in relation to its economy, was a hefty 83 percent last year, similar to France’s. (The big difference between France and Germany is that Germany’s economy is growing faster.)

The United States and most of Europe’s finances are hemorrhaging and both are showing rather pathetic attempts to get their houses in order. Unless their trajectories change quickly, they, particularly Europe, may be forced to answer a final question, posed by Samuelson, in the affirmative:

Would China contemplate bailing out Europe? If it did, there would be a stunning transfer of geopolitical power and prestige to China.

 
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  • Wren Lockwood

    Great post with fantastic insights underlying the present Global financial system that you don’t find commonly in the mainstream or financial media. It is this kind of original thinking and outside-the-box insights I’ve come to rely on the Global Markets page for. Kudos!

    Wren Lockwood
    Raleigh, NC

  • Cek Magdurlari

    The problem has nothing to do with an irresponsible government. The framers of the constitution intended it to be that way. Rather, it is a result of the government overstepping its constitutional boundaries. All too often, we hear people say “those conservatives, why don’t they let us pass this budget, or this resolution, or this law, etc. “Economic conservatism is antithetical to the idea that ANY government has the right to control you actions, especially through the form of taxation. Furthermore, a federal government is in fact not necessary to the establishment of Liberal priorities.

    The 10th amendment clearly reaffirms the constitutional provisions against the establishment of federal power. In Democrats like the wellfare state so much, they should implement it at the State and Local level. That way, you give people the choice TO LEAVE if they disagree with the policy, or if they feel that taxes are too high. Conversely, you also give people the choice to COME to your state if they like the benefits. The system that is most successful will win out, but there is no reason to have a national policy on these matters.

    Conclusion: I believe this bickering is due to the fundamentals of democracy, particularly American, at work. If you value your freedom, and your liberty, you would never abandon what we have here for the “faux” effectiveness of Chinese autocrats. The federal government should NOT force its will on the people or on the states. Wellfare programs should be run (or rather, run by the choice of the people) so that if an individual state chooses to dispose of that system, it can do so without federal prosecution.

Author

Patrick Frost
Patrick Frost

Patrick Frost recently graduated from New York University's Masters Program in Political Science - International Relations. His MA thesis analyzed the capabilities and objectives of the Shanghai Cooperation Organization in Central Asia and beyond and explored how these affected U.S. interests and policy.

Areas of Focus:
Eurasia, American Foreign Policy, Ideology, SCO

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