Tony Fratto: Knocking Down the China Myth

Timothy Geithner
Timothy Geithner

If there's one strategic communication goal Treasury Secretary Geithner should strive to achieve this weekend in China, it would be to strike down the myth that the U.S. is beholden to the Chinese because they buy our debt.

Curtain-raising news reports in advance of Secretary Geithner's trip to Beijing persist in repeating this myth. Reporters can be forgiven for their error, since it was Secretary of State Clinton who gave new life to the myth during her own ill-fated trip to Beijing earlier this yearwhen she begged the Chinese to keep buying U.S. paper.

We need to be clear about this: the Chinese do not purchase U.S Treasury securities out of altruism. And they don't buy them to blackmail American policymakers - unless American policymakers willingly and foolishly choose to be blackmailed.

China buys U.S. Treasury paper because it's in their own best, rational investment interests to do so. In short, they must.

Because of China's terms of trade with the U.S., and its policy to maintain a stable currency, the country accumulates enormous amounts of U.S. dollars. It has to do something with them, and that something is to invest in dollar-denominated assets.

The dollar-denominated assets of overwhelming choice are U.S. Treasury securities - because of their ample supply, selling in deep, liquid markets, and safety, they provide the best risk-adjusted rates of return in the world.

It is as crazy to speculate that the Chinese will suddenly stop buying assets from the U.S. as it would be to speculate that the U.S. would suddenly stop selling assets to the Chinese! This would be a revival of war games-style mutually-assured destruction!

There are long-term structural concerns and implications arising from the U.S.-China bilateral imbalances that must be dealt with over time. And it remains questionable whether the Chinese and other global buyers of dollar-denominated assets will maintain demand in the face of the tsunami of debt the U.S. will seek to finance in the coming years. (I have strong doubts.)

But Secretary Geithner should not arrive in Beijing on bended knee - the Chinese may buy American, but they don't own America.

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