Financial Times: Beijing under pressure to cut off its parasite (aka, USA)

China is ramping up its rhetoric against US Government.

[link to www.ft.com]


The shutdown lays bare the significant risks of buying US Treasuries, writes David Li

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"..almost all Chinese people understand that the US government has been playing the world economic game to its advantage.

The US issues, at rates of almost zero, Treasuries that are bought by investors all over the world. So long as the federal government increases the debt stock at a pace slower than the US gross domestic product growth rate (usually 2-4 per cent a year) minus the real interest rate (zero, or even negative in recent years), it can roll over the debt almost for ever, never worrying about paying it back.

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What is intriguing to most Chinese analysts is that Congress and the White House do not seem to understand the game’s benefits. The evidence is the US budgetary mess.

What is equally difficult to understand, from the perspective of many academic economists, is the Chinese government’s attitude and behaviour regarding the American debt issue. For many years, economists in China have argued that the government should diversify away from Treasuries, anticipating the US government’s continued high large primary budget deficit and political disputes.

It is indeed a delicate political economy equilibrium – and would quickly collapse if the US political situation created a realistic threat of default. Even if the US is able to avoid the catastrophe of a default, the potential for a repeat of the uncertainty means there are no guarantees the Chinese government can resist domestic pressure, not least from economists, calling for diversification away from investments in Treasuries. Netizens are also stepping up the pressure on China’s decision makers to stop lending to the US federal government.

Beijing may have to yield to domestic pressure and pursue its economic interest by following the practice of Japan, which claims to enjoy the best alliance in Asia with the US but has started unloading its Treasuries. We do not know how long long-term political logic can prevail over the economic rationale.

Last Edited by dawnie on 10/15/2013 11:01 PM