Spending on China's credit card

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Spending on China's credit card

                               
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from BBC NEWS | James Reynolds' China by James Reynolds  (BBC News)
Nationalholidays this week in China (1 October is the anniversary of the 1949revolution which brought the Communist Party to power).
The holidays mean that the Shanghai stock exchange is closed. So, we won't know how the markets here will react to the US non-bail-outtill the exchange opens again on 5 October. But this country is keepinga close eye on the financial crisis currently hacking its way throughthe United States and Europe.

                               
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Asit stands right now, the first wave of this crisis doesn't appear tohave hit China too badly. Chinese banks didn't get hugely involved insub-prime mortgages. Reports say that this country's financialinstitutions have stacked up about 4.3 billion dollars in losses (outof more than $500bn worldwide).
But, in the longer term, the crisis is bound to affect China muchmore directly. One simple reason explains it: if the world's biggestconsumer, the United States, can no longer afford to buy as much, Chinawill no longer be able to sell as much.
That's important, because China's recent growth is based on itsexports and on its engagement with the world - the United States inparticular. If the world scales down what it can buy, that will have ahuge impact here.
If people in Pennsylvania can't afford new DVD players or newmicrowave ovens, manufacturers in China will have fewer people to sellto and may have to shut down. The downturn in the States has alreadyaffected businesses in Shenzhen in southern China which would normallyexport in bulk to the US.
And there's another, crucial way in which China and the US arelocked together. In simple terms, America's been having a great timespending on China's credit card. Consumers in the US have been able tobuy homes, cars and occasional yachts partly because China's beenwilling to invest its own savings in US debt.
The background: China has huge amounts of foreign exchange reserves- or what you or I would call savings. China didn't want to keep all ofit under a mattress, so it scouted around for a place to keep it safe.It chose US Treasury bonds - low yield, but low risk - based on thebelief that the US economy is its safest long-term bet. So far, Chinahas invested several hundred billion dollars in these bonds.

                               
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Butnow - because of the financial crisis - America's having to look prettyclosely at its spending. And it's uneasy with the fact that so much ofits buying has been financed by a country which may become its greatestglobal rival. The subject was mentioned by both presidential candidatesduring their first debate...
"One of the major reasons why we're in the difficulties we are intoday is because spending got out of control. We owe China $500bn." -Senator John McCain.
"We've got challenges, for example, with China, where we areborrowing billions of dollars. They now hold a trillion dollars' worthof our debt." - Senator Barack Obama.
(It may be slightly worrying to find that the two men differ by$500bn as to how much the US owes China - one would imagine thatChina's keeping a slightly more accurate count of its money.)
I haven't come across any suggestion at the moment that China willstop investing its savings in the US economy. But here's a question forthe future - what happens if China decides to invest its moneysomewhere else?
PS. I'll be away during October. Please have a look at our Asia-Pacific index for news about China. See you back here in November!