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This had nothing to do with Biden reassuring the Chinese government. The Chinese were likely begging Biden to make such a statement, so they could in turn begin reassuring the Chinese people - this is why Wen came out with his glowing statement about the American economy. Ever sense the debt downgrade the citizens of China have taken it somewhat personally, and are wanting to begin holding their government accountable. That's a dangerous thing, but China is stuck investing in American Treasury Bills. If they screw us by attempting to do otherwise, it's mutually assured destruction.
Let me explain.
First, let's begin with the facts. Most of America's debt - roughly $14.3 trillion and counting - is owned by Americans in social security trusts, pension funds and by the Federal Reserve. When it comes to foreign lenders, China is indeed our biggest lender - owning roughly $1.2 trillion of our debt, which is more than Japan, the U.K., and Brazil - our next biggest lenders in descending order. That's not to say China isn't important - it is - but this is important for perspective.
Second, let's assume that China decided they wanted to divest even a reasonable portion of the American Treasury bonds that they hold. What would happen? It would trigger a panic selling of the dollar, which would of course hurt the U.S. economy. So, what's the problem with that, you ask? A huge one, for China. You see, China is addicted to a strategy of export-led growth. Who is the number one export market for Chinese made goods? America. If they hurt the American economy, they hurt their own.
It's actually worse than that for them, really, because it goes further. You see, in order to have that export-led growth, it requires them to keep their goods cheap, which means undervaluing their currency, which means buying U.S. dollars. Sure, they could hypothetically slow their purchase of American debt, but as their growth continues it will have to keep adding to its foreign reserves, which are now roughly $3.2 trillion. Where is it going to park all that money? There is deep animosity between China and Japan, so it isn't going to the Yen. Though there is no such thing as a European treasury bill, it could attempt to park it in something like British pounds or Swiss francs, the only problem is they can't buy them in the vast quantities that China needs given the cash it generates. If it were to stop buying treasuries, remember the value of the Yuan would rise. Chinese exports would become more expensive. Employment in China would fall.
This isn't good if you are a member of the Beijing government attempting to keep your hordes of Chinese workers occupied in their factories, producing goods that you're hoping and praying that Americans can still afford to buy. We know and they know they're trapped in a cycle of buying our Treasury bonds. No matter what any ratings agency says, no other bond market is as big or as safe for China.
Hence, this report is Biden doing the Chinese government a favor. They need us more than we need them.
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