This article originally appeared on the Chinese media website ifeng.com. Qiu Lin, the author, is an international economics commentator. The article examines the money lending and debt relationship between the United States and China and discusses Hilary Clinton’s recent hopes of selling more US debt to China. The article further speculates that the current situation of mutually coexisting high debt and high consumption in the United States is dependent upon the Chinese people’s continued propensity to save.

It’s a simple system: frugal Chinese workers and peasants put their earnings into the bank, then the bank loans out money to the [Chinese] government, which in turn loans money to the United States Treasury and the American mortgage loan tycoons (namely Frannie Mae and Freddie Mac, but otherwise known as the Federal Home Loan Mortgage Corp and the Federal National Mortgage Association). In the end, the money goes to support cheap mortgage loans (like the ones doled out before the American sub-prime mortgage crisis), as well as to fund the tremendously large fiscal stimulus package implemented by the Obama administration. In 2008, it is estimated worldwide that for every four dollars saved, one dollar originated from either the Chinese government or local Chinese businesses or families. (Reference: “The Youth Reference 青年参考,” December 15)

This is a portion of the content recently published by the American publication The Wall Street Journal, entitled “If China does not save money, what will the rest of the world do?” Although the author poses this question, upon finishing the article, it is clear that the real question is, “If China does not save money, what will the United States of America do?” We the people are compelled to ask: regardless of whether or not the Chinese people will save money, why does the United States feel obligated to respond in such a heavy-handed fashion?

To best answer this question, allow us to examine two different sets of data. First, the savings rate of China in 2009 as being calculated at 46%: for every 100 Yuan accumulated in China, approximately 46 Yuan of that amount would be entered into savings. Second, the savings rate of the United States as being 0.5%: it is estimated that for every 100 dollars earned in the United States, 150 cents would be spent in return. It has been said that China and the US occupy the two opposing extremes of an imbalanced world economy, due to the differences in respective consumption and saving rates between the two nations. Chairman of the United States Federal Reserve Ben Bernanke once said that it is the savings of the Chinese people that encouraged the growth of the US real estate bubble. In effect, US citizens love so much to consume because Chinese citizens love so much to save.

Because China has a steady and high year-round savings rate, in truth the Chinese can take chances and afford to consume more. The reason for this thriftiness is that perhaps the Chinese are more willing to sacrifice creature comforts and the enjoyment of the present to save money for future retirement or other purposes. On the other hand, Americans save little and spend a lot. American over-consumption has persisted for too long, and this is related to US industries that have become a shell of their former selves or have suffered a declining ability to compete well internationally. Before the international financial crisis of 2007, the manufacturing industry of the United States occupied a ratio between 12 and 15% of the country’s GDP. Correspondingly, US economic growth can only rely on the virtual economy that is given priority by the financial industry.

The fundamental reason why the United States is so committed to developing its financial industry is because of its ability to re-distribute the world’s wealth and give back to itself the lion’s share. It bears repeating that though China has just begun its rise, the lightning-quick rate of China’s developing economy needs investment and capital. So then why is it that China continues to give a transfusion of cash to the stagnating US economy? What is the force that maintains the relationship between these two countries with such disparate and uncommon economies? Here, the importance of China is evident and shines through. This is why US Secretary of State Hillary Clinton – on her very first visit to China – could not in any way conceal her need to sell US debt to the Chinese.

Presently, the United States has become China’s largest trading partner, in which 20% of China’s manufactured goods are exported to the US. To maintain China’s economic development, the US demand for Chinese goods must be stimulated. The method for this is to use a Chinese foreign exchange surplus to purchase US debt, which is equal to China lending money to the United States to allow them to purchase more of China’s own goods. This situation is just like a car dealership that loans a consumer an interest-free loan to allow him to sell his own car.

The Chinese people have created a considerable amount of wealth and have used it to exchange currency with the US. To that end, as of July this year China has purchased US debt to the amount of 846.7 billion USD. Obviously, no matter how China’s GDP will increase it will never surpass that of the United States – that is, unless China does not depend on US exchange in regards to foreign trade. Looking at it from another angle, American citizens could save frugally like Chinese citizens and refrain from purchasing foreign goods – thus keeping US financial assets within its own borders. However, as long as US citizens use US dollars to purchase foreign factories and natural resources in times of prosperity, then the US dollar will stay a prosperous one while simultaneously promoting the development of the US economy and the growth of the United States GDP.

The working model of the United States is one where high debt and high consumption mutually coexist. As the current debt of the United States occupies about 65% of the entire world, why then is there a pervasive notion that the US dollar is universally accepted as “not bad money”? It is said that China is a poor country while the United States is a rich country, but in this case it is China that is “lending” money to the United States. How could such a strange thing happen? From a common sense point of view, it is the rich man who lends money to the poor man. Why then hasn’t this money enriched the Chinese people? Why are they willing to lend money to make Americans richer 20 times over rather than giving it to themselves? How is it fair that the Chinese save money in order to allow Americans to spend?

A more logical approach would be that the Chinese become depositors who save to become consumers later on. In this way, they can strike the fine balance between consuming and saving. If the Chinese were to do this, then they wouldn’t have enough money to subsidize the United States and its lack of funds, and thus reduce its support for US consumers. This could be what Americans are worried about: if the Chinese don’t save money, then it is likely that Americans won’t have any more money to spend.
 

Source: blog.ifeng.com
 

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Keywords: China lends United States government billions Hillary Clinton sells US debt to China China loans US money