The New York Times today both informs and misleads on China’s role in the American economy. The Times headline warns, “China Slows Purchases of U.S. and Other Bonds.” That may well be true, but it isn’t supported in the story that follows.
The story actually cites slower growth in the PRC’s holdings of foreign currency, including dollars. China’s reserves fell $33 billion in January, before rebounding strongly in March. That’s an interesting development but it doesn’t bear directly on the U.S. As an illustration, the PRC’s holdings of Treasuries climbed $12 billion in January. The Times headline is close to being irresponsible.
There is value to the story, however. Beijing’s role in financing our budget deficit is diminishing. It’s diminishing first and foremost for the very unfortunate reason that our deficit is expanding so quickly Chinese financing can’t keep up. The Chinese role also may diminish if the PRC takes in less net dollars through investment and trade. Then Beijing will have less to store in American bonds.
We are running a bloated deficit from a bloated budget. In a few days, the Department of the Treasury is scheduled (they’re often late) to announce its finding on whether Beijing is manipulating its currency. In both instances — our policy and our response to Chinese policy — what should matter is solely facts on hand, not the PRC’s bond purchases off to the side. China’s purchases of our bonds are virtually involuntary, a result of a system they set up that leaves no choice but to buy American bonds with accumulated dollars. The importance of those purchases has declined and, at any rate, does not bear at all on whether we should be spending vast amounts of money we don’t have.
