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There Goes Another China Myth

Daniel Drezner, Professor, Tufts University
January 18, 2013
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One of this blog's persistent themes has been its insistence that the 2008 financial crisis did not, in fact, doom the United States to a future of inevitable decline.  Indeed, there are many reasons to be optimistic about America's future, and there are many reasons to be skeptical about claims that China will be able to exercise leverage over the United States. 

Daniel Drezner

Daniel Drezner

Now, one of the counterarguments to this thesis over the past five years has been the explosion of U.S. debt and Washington's need for Beijing to continue to buy that debt to finance America's current expenditures.  This was a running theme of financial writers in 2009.  Four years ago, there was a particular concern that "China is also trading long-term Treasuries for short-term notes."  If the United States could only borrow overseas by issuing more short-term debt, that ostensibly gave China some kind of leverage as Washington needed to continually roll over those debt obligations. 

I bring this up because Daniel Altman highlights a fascinating data point in his Foreign Policy essay about the shifting composition of the federal government's debt: 

In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.

Huh.  So it turns out that despite a surge in borrowing by the U.S. government and China's desire to keep the arrangement on a short-term basis, Washington has managed to borrow in a relatively efficient manner at historically low interest rates. 

Oh, and by the way, how has China altered its purchases of U.S. debt?  Well, besides a general slackening of such purchases (which partially explains the appreciation of the yuan) and a general lack of complaint in response to QE3, it has also changed the composition of those U.S. debt purchases

China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.

In other words, contrary to the fears of debt hawks in 2009 -- including, it should be noted, Hillary Clinton -- China has not exercised an iota of influence over the United States via its debt holdings.  Indeed, the shifting pattern of their debt purchases strongly suggests that the Chinese have recognized the futility of such an approach. 

While Beijing has recognized this truth, certain Very Serious People who write Very Serious Columns persist in being afraid of China's mythical debt leverage.  So, on occasion, as a public service, this blog will continue to remind its readers that U.S. remains clothed in immense financial power. 

Unless, of course, our politicians were stupid enough to self-sabotage that power.  Note to self:  start revising and updating this note to post-apocalyptic historians.

Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

© 2013. Foreign Policy.

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