Stop Being Wrong About China Buying Our Bonds

A blog about business and economics.
Oct. 17 2013 5:08 PM

Stop Being Wrong About China Buying Our Bonds

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BEIJING - AUGUST 08: The Chinese national flag flies during the Opening Ceremony for the 2008 Beijing Summer Olympics.

Photo by Adam Pretty/Getty Images

No subject attracts as much wrong commentary from people in positions of authority and influence as China's purchases of American government debt. Recent antics around the debt ceiling managed to bring about a new surge in wrongness on this subject, so let me set you straight about it once and for all.

Many objects are manufactured in China these days, and many of those objects are purchased by people and firms located in the United States of America. And before an American firm can purchase something from a Chinese firm, the American firm needs to trade some of its US dollars for some Chinese money. Thus America ends up with more Chinese-made goods and China ends up with more American money.

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Now in the natural course of floating exchange rates what would happen here is that the dollar price of Chinese money would rise, and this would increase the price of Chinese-made stuff in America and decrease the price of American-made stuff in China. That in turn would tend to discourage the flow of Chinese-made stuff to the United States of America.

But the Chinese government for various reasons wants to subsidize Chinese manufacturing. So they want to send those dollars they accumulate back to the United States. In principle that could accomplish this by buying lots of Boeing airplanes and crashing the planes into the Pacific Ocean. Or the Chinese embassy in Washington could order enormous quantities of Chipotle burritos and then throw them out. But that would be so hideously wasteful as to become politically untenable. They could also make huge purchases of the stock of American companies, but that might be politically untenable in a different kind of way. So what they choose to do instead is to purchase lots of US government debt. That's a nice quiet way of limiting the extent of Chinese currency appreciation.

But that's all it is. It's not an investment. Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. The American government doesn't need China to provide it with American fiat money—we have plenty of American fiat money. This is Chinese industrial policy and it is conducted for domestic Chinese political reasons and will end some day for domestic Chinese political reasons.

It doesn't give China any leverage over the American government, and congress being ridiculous about the debt ceiling shouldn't have any impact on Chinese thinking about it.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.