The mother of all debt traps

2023 年 09 月 12 日   閱讀量:15.55萬+

Written by

HO, Chi-Ping, Patrick



Image source: Internet

Ever since the launching of the Belt and Road Initiative (BRI) in 2013, the west has been mud-slinging this Initiative as Chinese “debt trap” for the recipient countries along the Belt and Road region. However, China has another perspective on the meaning of “debt trap.” For Beijing, the mother of all debt traps is the United States of America.

For years, much of China’s enormous trade surpluses with the United States— the very same ones the Trump administration wants to eliminate—were ploughed back into the U.S. economy though the acquisition of U.S. Treasuries. In 2008, as part of its response to the financial crisis, China surpassed Japan as America’s number one debt owner. In 2019, the People’s Bank of China owned roughly $1.1 trillion in U.S. Treasuries and another $300 to $400 billion in debt of government sponsored enterprises like Fannie Mae and Freddie Mac. Add to this, U.S. debt held by China via subsidiaries in places like Hong Kong and Belgium and the total amount was well over $1.5 trillion—roughly one quarter of total U.S. foreign debt. Roughly half of China’s $3 trillion foreign exchange reserves were invested in U.S. Treasuries. But while Washington has identified Beijing as public enemy number one, as U.S. debt grows, Washington is also so confident in China’s insatiable appetite for its debt that it expected China to buy more and more of it.


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In recent years, China has been undergoing an intense internal debate about what to do with America’s debt. Beijing is not likely to dump its Treasuries as Russia has recently done. This would be self-defeating. After all, its economy is still closely intertwined with America’s, and with roughly over $700 billion a year of bilateral trade on the line. And even if it were in China’s interest to do so, it would not be possible for Beijing to find a buyer for such a huge amount of U.S. Treasuries unless it offered them at a heavy discount. But the debate is not about dumping the treasuries China already owns. It is about the wisdom of rolling over those that mature. Contrary to what Yellen has hoped and wished, currently China has not a scintilla of appetite for increasing its current holdings to the levels needed to meet the steadily growing U.S. fiscal needs. In fact, since the beginning of the trade war in 2018, its holding of U.S. bonds has been steadily declining to a mere 835 billion today.

Image source: Internet

To understand China’s dilemma there is no escape from delving into some numbers. U.S. federal debt currently amounts to over $32 trillion. Under the baseline scenario of the Congressional Budget Office (CBO), the U.S. federal deficit is projected to grow between 2018 and 2028 at an average rate of $1.2 trillion a year, adding a total of $12 trillion to the national debt, not to mention the additional easing in 2020 in response to the epidemic. This means the total debt held by the public in 2028 will be projected to reach way over $37 trillion! Over the past 50 years, the annual deficit has averaged 2.9 percent of GDP, but going forward, from 2023 through 2028, it is projected to fluctuate between 4.6 percent and 5.2 percent. It is thus very clear that soon the United States will no longer be able to borrow so easily the amount of money it needs to finance its budgetary obligations. The interest payments would simply become prohibitive. The cost of servicing over $32 trillion of debt would necessarily chip away at education, research, environment protection, infrastructure building, and domestic investments. At the current growth rate of debt, the federal government will have to borrow on average $1.2-1.4 trillion if not more each year.  And the U.S. expects China to increase its holding of U.S. Treasuries by an additional $70 billion every year.


Image source: Internet

How long does anyone think China will agree to fund the very same U.S. military that is preparing to fight China, the education system that is striving to outsmart it and that is closing its gates to Chinese students, the research and development infrastructure that aims to undercut China’s technology development programs, and the U.S. Department of Justice lawyers who are prosecuting Chinese companies and nationals? To paraphrase Lenin, China is no longer willing to pay the capitalists for the rope on which they plan to hang it. Even if the relations were great, China would still be hard-pressed to finance America’s spending feast. In what the Wall Street Journal called a “tectonic shift” in China’s economy, China’s trade surplus with the rest of the world is readjusting. This implies that what once was a nation of savers, with the highest saving ratio in the world, is turning slowly into a nation of consumers. While still an export powerhouse, China is generating more and more of its growth from domestic spending. In other words, China is turning to be somewhat like America, adopting its playbook. For the United States, the implication of China becoming a consumption and demand-driven economy is that it would have less of a dollar surplus with which to buy U.S. Treasuries.


Image source: Internet

Naturally, if China decelerates its debt buying, the U.S. will be forced to seek alternative buyers. The problem is that with the erosion in trust in the U.S. and its currency on the one hand, and the slowing down in global growth on the other, there may not be many takers. Japan’s slow growth and aging population means that it too may not be able to keep up with the growing budgetary needs of the U.S. government. The third largest foreign holder of U.S. debt, with more than 10 percent of the total, roughly $700 billion, is not a country but “FAANG”, which stands for Facebook, Apple, Amazon, Netflix and Google—five top American corporations that keep their profits abroad in low tax havens like Ireland, Luxembourg and the Cayman Islands. These billions are being gradually repatriated to the United States, perhaps under coercion and threats, taking advantage of Trump’s 2017 Tax Cuts and Jobs Act, which lowered their corporate tax burden. Since FAANG’s money is heading home, willingly or unwillingly, a hefty portion is being funneled into purchases of more U.S. Treasuries. The rest of America’s foreign debt is lodged in the UK, Brazil, Singapore, Saudi Arabia, South Korea, Switzerland, India, Canada, France and elsewhere, but most of them are either reducing their Treasury holdings or have no capacity to increase them by much. For the ordinary observers in the East, the gap between America’s fiscal needs and the willingness and the ability of the rest of the world to meet them is glaring. What is baffling to them is the American media and politicians’ indifference to the coming train wreck. Somebody is missing something!


Image source: Internet

Like it or not, China is the only country that has the capacity to finance America’s spending, a fact that most policymakers choose to ignore. And the concern is not only China declines to buy more of them, but China begins slowly and insidiously dumping its existing U.S. Treasuries. Without China’s willingness to gobble more debt all that is left is the lender of last resort—the Fed and the U.S. government itself— and that too would have serious and long-reaching consequences. If China decides not to underwrite more U.S. debt, the U.S. will be forced to raise the yields on its bonds, but this means higher cost of debt servicing as interests soar, and which means less money for defense, education, health, etc. Niall Ferguson’s theory that empires fracture and fall when the interest on debt surpasses the defense budget still rings true, and we shall soon be witnessing another example of this supposition.

Image source: Internet

From China’s standpoint, pouring more money into the American debt hole makes no sense. It prefers to redirect more and more of its money to other foreign investments, while diversifying away from dollar reserves into other assets like gold. Indeed, it has just been reported that China has dumped 481 billion of US Treasuries, and bought 6927 tons of gold from overseas. The Belt and Road Initiative is therefore China’s mechanism for reallocating its large foreign exchange assets away from what it views as the American debt trap into more rewarding and growth yielding infrastructures and technology investments. China has already made its decision loud and clear: its money is going to build China and its Asian neighbors—not finance reckless spending in America, the mother of all debt traps!

Edited by Fang Fang

Proofread by Wang Yan