China and U.S. Debt

Originally published at The American Thinker

As the U.S. federal debt is steadily climbing closer to $17 trillion, President Obama and Congressional leadership are making statements that we “don’t have an immediate crisis in terms of debt.” All the same, our bloated federal debt does pose a crisis. Not only will it slow economic growth, threaten us with higher interest rates, and increase inflation; it also allows China to threaten our national security and status as a world power.

How does China’s ownership of the U.S. debt really pose a danger to our national security?

China currently owns over 7% of U.S. federal debt via U.S. treasury securities. If China were to decide to dump those treasuries, it would greatly increase the burden of servicing U.S. debt. This could lead to a currency crisis forcing the U.S. to raise interest rates. Higher interest rates and higher risk for borrowers will potentially make it difficult for the U.S. to find creditors and will create the conditions for a recession.

Additionally, statements made by numerous Chinese officials have expressed support for the use of U.S. debt ownership as a weapon. Statements such as a senior editor of the state-run media outlet China’s People’s Daily who wrote, “now is the time for China to use its ‘financial weapon’ to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan.” In addition, according to China Times, the country’s central bank deputy governor Yi Gang announced, “China is fully prepared for a looming currency war should it, though ‘avoidable,’ really happen.”

Despite statements such as these, most analysis of U.S.-China policy, including reports from the U.S.-China Business Council (UCBC) as well as a report issued in July 2012 by former Secretary of Defense Leon Panetta, argue that the threat of using large holdings of U.S. debt for political advantage is nothing more than hot air.

The conventional wisdom is that China would never dump U.S. securities because an abrupt movement out of U.S. securities would be detrimental to both China and the United States. It would not be rational for China to take huge losses because they would be harming themselves.

The problem with the conventional wisdom is that it leaves several questions unanswered, such as: what if China is not rational? Alternatively, what if the potential damage to the Chinese economy is a calculated harm, which will serve an ultimate end goal?

China has been growing their financial sector but not for reasons of improving the livelihood of their citizenry. The growth in their financial sector has had little effect on the country’s GDP, which they have covered by artificially inflating their GDP growth to a reported 7.8% when in actuality, economic indicators indicate it to be closer to 3-4%.

China has pumped extensive liquidity into their internal currency markets and it is easy to assume that the growth of their currencies’ liquidity is a step toward gaining international reserve status for the Yuan. This currency liquidity requires China to have an export market to develop for the Yuan. Over the past few decades, China has become a global manufacturing hub with a near-monopoly on numerous key rare earth resources, China is positioning itself as the key global manufacturing and trade hub for an array of components and finished goods. The country now produces 20% of global manufacturing output, rendering the rest of the world dependent on the flow of goods out of China.The icing on the cake of being the hub of manufacturing and trade would be to have the Chinese Yuan as the world’s reserve currency.

At present, the global financial system is centered on the U.S. dollar. Countries from around the world keep huge reserves of our currency lying around for the sake of international trade. This reserve currency status that the dollar possesses allows the U.S. to sustain an assertive foreign policy. If the dollar were to cease being the global reserve currency, the U.S. government will be much weaker internationally. In addition, the country will have a much harder time financing our debt, leading an already difficult to manage debt impossible to maintain and collapsing our economy.

It is important to note that China is not a capitalist nation. Capitalist nations have thriving open markets and numerous freedoms such as an open internet. The people of China do not have the luxury of capitalism; they have a repressive communist government interested in power.

China’s power grab does not involve only financial markets. The Chinese military has been growing at exorbitant rates over the past few years. Not only does China have a large nuclear stockpile and a growing drone program, the growth of their naval fleet through the development of the aircraft carrier Liaoning — along with several more planned in the future — will help solidify their status as a superpower. An aircraft carrier will allow China to deploy troops and aircraft to regions around the world.

The Chinese People’s Liberation Army has been linked to hacking groups that are seeking the ability to sabotage power grids and steal intellectual property at alarming rates. Chinese hackers have stolen terabytes of data from U.S. corporations involved in the United State’s critical infrastructure.

Not only is China employing a highly antagonistic posture towards America. Their actions have grown more aggressive toward their neighbors over the past several years. These activities continuously test America’s commitment to its Asian allies.

China has grown increasingly belligerent towards Japan both militarily as well as through their financial markets thanks to a longstanding dispute over the contested Senkakus Islands in the East China Sea.

Additionally, China, which regards Taiwan as a renegade province, has threatened to use nuclear weapons in response to Taiwan’s interests in autonomy. This makes China the only country with nuclear capabilities to threaten to use the bomb against people and territories they consider their own.

When one looks at their trajectory, it is not hard to conclude that China’s long-term goal is to replace the U.S. as the world’s sole superpower. While they have a lot to lose by reverting to financial terrorism and dumping the dollar, they may feel that they will come out on top after toppling the dollar.

With a weakened America, and the international community relying on the Yuan as a reserve currency, it is not hard to imagine China making good on their belligerence towards their neighbors. After island hopping across Asia and the Pacific, it would only be a matter of time before we start seeing the Chinese navy patrolling around Europe, Africa, and America.

Despite statements made by various analysts, there is a real threat that China will dump U.S. debt. The theory that they will not because it would hurt their economy is predicated on the idea that China is a rational actor looking for financial growth. However, any country that manipulates and lies to prop up their financial markets; considers financial terrorism as a viable option for getting what they want; and threaten their neighbors as well as their own people with nuclear weapons is not a rational actor that belongs in the category of “superpower.” Our growing national debt is a danger in and of itself, but giving China the ability to flex its muscles by means of that debt is something that should not be allowed to happen.