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China is a banker over a barrel

By Derek Scissors - posted Tuesday, 24 March 2009

Trade, human rights, North Korea, naval standoffs … America and China have plenty to talk about.

Nothing new about that. But in the last six months or so, whenever these issues come up, someone - a Chinese official, a journalist, sometimes even an American official - will pipe up and claim the US can't press our interests firmly because "China is our banker".



If China's our banker, it's the kind of banker I'd want. A banker who:

  • gets his money from me in the first place;
  • has nothing to do with most of the money except give it back;
  • is less important to me with each passing minute; and, oh by the way,
  • needs me to provide jobs for a nice chunk of the town he lives in.

A closer look at the US-Peoples Republic of China (PRC) economic relationship, including the financial part, reveals that it's the PRC that needs to be cautious, not the US.

The relationship starts with trade. Americans buy things made in China. Lots of things, to the tune of $337 billion last year. We trade with them to get very cheap, high quality clothes and consumer electronics; they trade with us to get the jobs making those things. Advantage: US.

Why? Because we can get our clothes elsewhere, at prices not too much higher. But the Chinese would have a tough, probably impossible, time replacing the high-quality jobs involved in sending $337 billion worth of stuff to the US. Here's the up-side to our credit card culture: the American consumer is irreplaceable.

That leaves the financial side, where they buy our bonds. Does this balance our greater power in trade? Not really. Buying our bonds doesn't give the PRC that much leverage over us because they lack viable alternatives - largely because so much money is involved.


Subtracting how much China paid for US goods and services last year from what we paid them, leaves the PRC $266 billion ahead. The year before, they racked up $256 billion that way. And they have even more dollars from investment and trade with countries that use dollars. The bottom line: Beijing has a whole lot of greenbacks on its hands, even by Washington, DC, standards, and the number has been getting bigger every year.

Now for the most important part of the discussion: China can't spend the money at home.

Beijing has set up a system whereby:

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First published by The Heritage Foundation on March 14, 2009.

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About the Author

Derek Scissors, PhD, is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation in the United States.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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