China’s Treasury Holdings Make U.S. Woes Its Own

New York Times ^ | July 18, 2011 | DAVID BARBOZA

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DAVID BARBOZA

However grim Washington’s debt and deficit negotiations may seem to Americans, the impasse is nearly as disturbing for China.

As the United States’ biggest foreign creditor — holding an estimated $1.5 trillion in American government debt — China has been a vocal critic of what it considers Washington’s politicized profligacy.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said at a news conference late last week.

Beijing might prefer to respond by starting to dump some of its American debt. But in this financial version of the cold war, analysts say, both sides fear mutually assured destruction.

One reason the United States would want to avoid defaulting on its debt is that such a move could alienate China, which is a steady purchaser of Treasury bonds. Beijing, meanwhile, already has too much invested in American debt to do much more but continue to buy, hold and grumble.

It is the ultimate “too big to fail” global relationship, said Andy Rothman, an analyst in Shanghai for the investment bank CLSA.

If Beijing even hinted that it might try to sell part of its American debt, “other countries might sell their dollar assets,” Mr. Rothman said, noting that this would drive down the value of China’s holdings. “It would be financial suicide for China.”

China got into this situation, experts say, by indulging its own economic interests. To bolster what has become the world’s largest export economy, China has focused on policies that encourage domestic savings and hold down the value of its currency. The result: huge trade and current-account surpluses. China has accumulated more than $3 trillion in foreign currency reserves, far more than any other nation.

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“China has no choice but to keep buying,” said Zhang Ming, an expert at the Chinese Academy of Social Sciences, a Beijing research group. “After all, U.S. Treasury bonds are still the largest and most liquid investment product in the world.”

All of which has helped enable America’s own fiscally dubious habits. But even now, despite Beijing’s scolding about the debt impasse in Washington, China’s options may be limited.

To the Chinese, being so heavily committded. involved with the US was a no-brainer, a sure thing and now they're all sad and forlorn. sniff, sniff. Someone ought to tell them that when you owe the bank a thousand bucks , the bank owns you. Owe the bank ten million dollars and somehow it is you who owns the bank.

[EQAndyBuzz]

Cut the 1.5 trillion this year and give it to china, telling then to piss off.

Then stop going into debt.