America Has Become Subservient to China

As the U.S. tries to spend its way out of the worst economic downturn since the Great Depression its debt continues to mount. In Sept. a new nation became the largest foreign creditor of the country.

Now owning one out of every $10 of U.S. debt, China has surpassed Japan to become the largest foreign holder of U.S. debt. China officially owns $585 billion in U.S. debt after financing $43.6 billion in Sept., while Japan owns $537.2 billion in U.S. debt.

"This is a sign of the growing interdependence between the Chinese and U.S. economies, but also a sign of a relationship that is not healthy in the long term," said Eswar Prasad, an economics professor at Cornell University and a senior fellow at the Brookings Institution in Washington. "There are inconsistent policies on both sides of the Pacific that are working against a more flexible Chinese exchange rate and the reduction of China's large trade surplus. This is a problem for the United States."

Not only is China America’s largest foreign creditor, it is likely the largest creditor of the U.S. period. With china holding such an enormous amount of U.S. debt, it is unlikely that any entity in the U.S. is holding as much debt.

Some analysts believe that U.S. debt to China could actually be over $800 billion because China has allegedly been purchasing U.S. debt through third-party nations.

China now has the capability to further manipulate its own currency and potentially wreak havoc on the American economy if it wishes. If China were to suddenly move out of government bonds, others would likely follow. China’s removal could cause the cost of borrowing to skyrocket, which would only compound the current credit freeze. China could also stop buying or it could start selling U.S. debt, causing an assortment of interest rates to rise rapidly. In addition, with China holding so much U.S. debt they are artificially strengthening the dollar while undervaluing their own currency. This is in essence cutting off their huge market to U.S. products because of the inflated prices. Perhaps this is why China imported five times as much to the U.S. as we did to China last year.

"This is an unhealthy relationship," said Brad W. Setser, geoeconomics fellow at the Council on Foreign Relations. "The U.S. relies too heavily on subsidized financing from a non-democratic government. And China is still a poor country that has in turn invested too much of its national savings in the United States. There remains an underlying financial vulnerability if China were to scale back its purchases. It could deliver a shock to the United States."

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