From Renny Babiarz at Rennypolis, we read the following:
Economically the US is currently more dependent upon China than ever before in the history of either country. This dependence is seen most clearly through China’s current financing of US debt through the large-scale purchasing of US Treasury Bills, and the sudden cessation of this financing and/or large-scale selling of these Treasury Securities would carry catastrophic economic effects for the US economy.
The US national debt as of 4/6/06 reached $8, 387, 208, 000, 000 (figure rounded to the nearest million). To finance this debt the US sells Treasury Securities, also known variously as T-Bills, T-Notes, and T-Bonds. These “debt securities” range in maturity period (from three months to 30 years) and rates of return (discounted selling price or period coupon payments); altogether they serve the purpose of assuring a flow of hard currency into the US Treasury for day-to-day operations. Approximately $4.6 trillion of the US national debt is held publicly (i.e. outside of the US government), and of this about $2.2 trillion is held by foreign central banks and officials. As of January 2006, China held approximately $262.6 billion worth of US Treasury Securities.
With this as background, in an underreported story on Saturday we learned that Fed chairman Benjamin Bernanke recently issued a letter to Senate Banking Committee Chairman Richard Shelby saying he could not rule out a hard landing for the Chinese economy:
Federal Reserve Chairman Ben Bernanke said in a letter obtained on Friday that chances of an economic crisis in China were low, but that the possibility of a “hard landing” for the economy could not be dismissed.
“We believe that the chance of a Chinese economic crisis is very low for the foreseeable future,” Bernanke wrote in a August 30 letter to Senate Banking Committee Chairman Richard Shelby.
“Although the banking sector is burdened with an enormous and probably growing stock of problematic loans, the government possesses sizable resources and is unlikely to allow the banking system to fail,” Bernanke told the Alabama Republican. He also said Beijing’s large foreign exchange reserves made a currency crisis unlikely.
“However, we do not entirely discount the possibility of a ‘hard landing,’ in the form of significantly slower growth, as authorities attempt to reduce investment growth from its current rapid pace,” he wrote.
The Fed chief said the rapid pace of investment in China was leading to overcapacity in some industries and likely adding to bad loans already on bank books.
“However, there is less evidence of widespread overheating. Inflation is still quite low,” he added.
Full article here.
It seems to be a precarious situation, but Babiarz points out the following:
…[T]he current Chinese leadership is extremely unlikely to stop purchasing US Treasury Securities in the short-term because the consequences on the US economy for such a decision will also be felt by the Chinese economy. The US consumption of Chinese goods remains a major engine of economic growth in China, and thus a major economic contraction in the US would in turn severely affect Chinese economic growth. Furthering this interdependence is the US Treasury Security market itself. China’s extensive US security holdings help to prop the value of the US dollar relative to the Chinese currency, in turn holding down the cost of Chinese products for US consumers in support of the current situation. This illustrates Blyth’s rather colorful description of China suddenly dumping US Treasury securities as “Monetarily Assured Destruction” (MAD), since such an action would undoubtedly result in adverse effects for the Chinese domestic economy as well.
See full piece here. In his interesting two-part report, Babiarz is much more worried, on the other hand, about political instability in Asia.