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Some in China would drop U.S. holdings and invest in their own country

Section: Daily Dispatches

By Jim Landers
The Dallas Morning News
Sunday, September 19, 2010

BEIJING -- China's young bankers and budding economists are part of a wired, frustrated generation looking for their inheritance.

They've enjoyed the savings of their parents to get this far. Now they are looking to collect their due from another source -- the money China has loaned to the United States.

The Council on Foreign Relations estimates that China holds at least $1.4 trillion of U.S. debts, plus $231 billion in corporate bonds and equity. That amount works out to a loan of roughly $4,500 to every American.

... Dispatch continues below ...


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This debtor-lender relationship between America and China is a "financial balance of terror," as White House adviser Lawrence Summers once put it. If China sold its dollar holdings, U.S. borrowing needs are so great that the sale could cause a spike in interest rates and push America back into recession.

But if the U.S. decided to cover its debts by printing more money and pushing up inflation, China's investments could drop in value by hundreds of billions of dollars.

Each side worries about the other's intent.

"These large [holdings], in my opinion, are not worth it," said Tang Zhe Zhe, a 25-year-old financial journalist with, an Internet magazine.

"Maybe there are some diplomatic situations where it's nice to have them in negotiating with the U.S. government," she said. "But maybe they should invest them in our own country."

The U.S. government doesn't have much choice. Domestic savings aren't enough to cover the huge federal budget deficits. And America's trade deficit forces the country to borrow abroad to cover the amount sent overseas to pay for imports.

Some Chinese capital is flowing into private U.S. companies and projects rather than government debt. Dallas investor Cappy McGarr is working with some big state-owned Chinese firms to build a $1.5 billion West Texas wind energy farm.

"It's a very positive step that the Chinese government and Chinese companies have decided to come over here and invest in America rather than just buy our T-bills" or other U.S. government debt instruments, McGarr said.

In March, China National Petroleum Corp. bought a 51 percent stake in ION Geophysical Corp., a Houston petroleum exploration firm, for $108.5 million. The investment kept the Houston firm from going under, saving 400 jobs, ION officials said.

But the bulk of China's money in America is in federal debt. And that makes both sides nervous.

A February poll of more than 2,000 adults by Zogby International found that, by a 2-1 ratio (58 percent to 27 percent), Americans were more worried about the national security implications of their debt to China than they were about radical Islamic terrorism.

Earlier this year, a retired Chinese general urged the government to dump its American holdings because of U.S. arms sales to Taiwan.

"At every G2 [China-U.S.] summit Chinese leaders ask American leaders about the safety of our assets," said Liu Yuhui, an economist with the Chinese Academy of Social Sciences.

China has tried to diversify some of its reserves by buying Japanese bonds and gold and by lending money to develop foreign oil fields.

Dallas is at the forefront of China's investment forays in U.S. wind power -- and not just through McGarr. Patrick Jenevein, head of Dallas-based Tang Energy Group, has worked with Chinese partners to build a wind turbine blade company in China that is looking to expand into the U.S.

"Right now the U.S. government has a monopoly on the lender. Cappy has helped to break that, and we have too," Jenevein said. "That's actually brilliant. He is finding for U.S. investors another source of capital. The country [China] has so much money, they can lend not only to the U.S. government, but to U.S. companies to do better things with the money."

... Youths' view

Young, urban Chinese say the money should be used to boost salaries and address China's problems like expensive housing.

"What China should do is bring labor, energy, and environmental costs back to a more normal level," said Mil Ken, a graduate student at the People's Bank of China. "America has to reduce spending and increase saving."

Xia Wie, a 24-year-old graduate from Guizhou province, worries about the cost of housing and pollution in China. To her, lending money to the U.S. doesn't make sense.

"America is a developed country and does not need China's money," she said. "Let China put its money into itself so China will be strong."

It's also not sensible to Lin Xiang, a 25-year-old graduate of Peking University's Guanghua School of Management.

"We have financed the American people's overconsumption for many years," Lin said at a Starbucks on Financial Street, near the investment bank where he works.

These young people are part of China's '80s generation -- born under China's one-child-per-family law. They have benefited from their parents' savings with university educations, the latest mobile phones and laptop computers. Some also have parent-financed cars and apartments.

Those who go to work for private financial institutions earn some of the highest starting salaries in China -- about $21,000 a year. While that's well above the earnings of high school graduates working in factories, the average cost of a condominium in Beijing this year shot up to $172,500.

Their social lives have moved from college dorms to coffee houses, shopping malls and Internet chat rooms, where they debate pollution, China's inflated housing market and, sometimes, loans to America.

... Treasury bonds

China's massive holdings of U.S. debt are mostly in low-risk Treasury bonds ($1.015 trillion) and securities issued by federal mortgage backers Fannie Mae and Freddie Mac ($447 billion), according to estimates of the Council on Foreign Relations. The numbers are higher than U.S. Treasury estimates, because they include bonds purchased in London by the Chinese.

The bonds are the fruit of China's trade surpluses. Exporters relying on cheap labor have made China the world's factory. China tightly controls the use of its currency. The dollars that exporters earn abroad must be surrendered to the Chinese central bank in exchange for renminbi.

The People's Bank of China takes the dollars and invests them abroad. In 2000, it had $165 billion of foreign exchange reserves. In October 2006, its holdings passed the $1 trillion mark. Today, the bank has $2.45 trillion. Bank officials say 60 percent of these reserves are denominated in U.S. dollars.

Control over the renminbi is crucial to China's ability to set the value of its currency. Many U.S. economists and manufacturers say China has kept the renminbi artificially low to support its exports. They argue that the renminbi should gain as much as 40 percent against the dollar.

(A big reason why that's unlikely is it would reduce the value to China of its U.S. debt holdings by over $500 billion.)

Chinese goods have flooded America, rewarding consumers with low-cost housewares, consumer electronics, tools, clothes, toys, shoes, and scores of other products. These inexpensive goods kept U.S. inflation low. And as China poured its trade surplus into U.S. bonds, it also kept interest rates low -- encouraging Americans to borrow.

Critics in American industry say cheap Chinese goods also eroded the ability of U.S. companies to compete and cost the nation 2.4 million manufacturing jobs.

Many in Congress have threatened China with tariffs and other sanctions over its low exchange rate.

... Value of currency

Many Chinese university students and graduates object to U.S. efforts to compel a rise in the value of their currency. A group of students at the People's Bank of China Graduate School in central Beijing griped recently that it's like a low-scoring test taker trying to get the same benefits as a high-scoring student.

"If we are to appreciate the value of the renminbi to balance U.S.-China trade, is that because the U.S. wants China to make a sacrifice?" asked Suva, a master's degree candidate who did not want her full name used.

Joe He, another student at the People's Bank of China Graduate School, said raising the value of the renminbi won't end America's trade deficit.

"America needs Chinese goods for its basic necessities," he said. "If you don't buy them from China, it will be India or Mexico."

Chinese officials and think-tank economists say the country needs to move away from its reliance on low-priced exports. Workers in the export industries have staged a series of well-publicized strikes for higher wages (now often as little as $160 a month). Inflation in housing and other necessities is made worse by the amount of renminbi issued to exporters in exchange for their dollar earnings.

China's President Hu Jintao, in a speech this year, pushed the country to move from an economic model based on low-value exports to domestic consumption and more advanced goods and services. He used the term "speed up" more than 50 times.

For the students and young graduates, change can't come soon enough. But they feel powerless to act.

"We have no choice in what the government is doing," said Lee Gong, a 24-year-old senior at the Peking University management school. "The Chinese people don't have a say because we have no voting rights."

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