Record US Debt has China Worried


The record deficit in the recently proposed Federal budget has reawakened debate in China over the wisdom of holding so much U.S. debt.


The budget proposed recently by the White House projects a record $1.6 trillion budget deficit for this fiscal year. That’s a whopping 10.6 percent of GDP, up from a 9.9 percent share of GDP in 2009 (Obama’s 2010 budget: deficit soars amid job spending). The forecasted total deficit going forward is even more alarming. Even if all goes to plan, U.S. public debt will rise above 70% of GDP by 2013, and to almost 80 percent by 2020. This could spook investors and hurt the standing of the dollar.

This has reawakened a debate in China over their massive holdings of US debt. A recent editorial in The 21st Century Business Herald said “If China can’t break out of the dollar trap and we continue to pour our financial and fiscal lifeblood into U.S. Treasuries, then once we’ve nourished the U.S. economy back to health, the pattern of U.S. hegemony will also return. (The Return of China’s Treasury Angst.)

Some of the blogs are even harsher, with statements like, “China has become a ‘happy fool’. Happy – because of its vast US$ reserve in the pocket. Fool – because the money in the pocket is closely guarded by the highly venomous snake. (Is China kidnapped by US debt?)

That doesn’t mean that China will be dumping U.S. Treasury investments anytime soon – they need a strong dollar and a strong U.S. economy. But, it does raise the possibility that China will start to look elsewhere for places to safely invest an increasing portion of their reserves. (Not that Europe debt is looking any more attractive than the U.S. right now!). The current level and direction of U.S. government debt is cause for considerable concern and should prompt a search for a different dynamic on both sides of the Pacific.

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