If China Is Worried About U.S. Debt, How Worried Should We Be?

Wen Jiabao; file photo

Question: China’s Premier Wen Jiabao said today he was “worried” about China’s $1 trillion investment in U.S. securities. So, should the United States be worried about his worry?

Paul Solman: In response to any economic problem these days, I’m tempted to misquote the sage of an earlier era, Mad Magazine’s Alfred E. Neuman: “What, me not worry?”

But more than Wen Jiabao’s “worry,” I’d worry about the fact that he is uncharacteristically worrying aloud. Hillary Clinton was in China late last month and made an appeal to the Chinese to keep buying U.S. Treasuries. Today, Wen is quoted in China Daily as saying at a press conference: “We lent such huge fund to the United States and of course we’re concerned about the security of our assets and, to speak truthfully, I am a little bit worried.”

I don’t know the ins or outs of Chinese politics (I hope this doesn’t come as a shock), but the message would not seem designed or timed to reassure.

As to its immediate impact, the interest rate Uncle Sam has to pay for borrowing money long-term was up by 1-2% today. On the other hand, last I looked, short-term rates were DOWN, suggesting that investors, perhaps including the Chinese, are still eager to lend their money to the United States, presumably thinking us a safer bet than pretty much any other borrower out there.

If you need more to worry about, try this.

Wen also promised to further stimulate the Chinese economy with cash outlays. Short of printing more Chinese currency, the way to pay for any stimulus would presumably be to draw down China’s $2 trillion worth of foreign reserves. U.S. Treasuries make up nearly half that total. It’s bad enough if China stops BUYING our Treasuries, considering all the money we’re about to borrow to finance the stimulus and bailouts. But will China now start SELLING its Treasuries?

According to today’s China Daily, “Wen said the country’s foreign reserves will be mainly used in overseas investment and trade.” That might mean China would make investments in the United States with the dollars it gets from selling its Treasuries. But if not…

Last comment. China seems to be the hope of the moment for world economic revival. But having reported from there in 2005 at some length, I can report that Chinese growth seemed as precarious as it was overwhelming, dependent as it was on exports and planned investment in housing – housing for the 20+ million workers migrating from the hardscrabble countryside to the cities every year, workers who are now reportedly heading back home from their export-making jobs. Yikes.