Why China Must Save USA?

The debt-ridden US has called on the Chinese government to continue buying its Treasury bills to support its stimulus plan as the world’s largest economy is on the brink of a recession, the worst since the Great Depression in the 1930s.

Already China is the single largest holder of US government bonds and the amount is estimated at US$696 billion as of end-2008. The second country after China is Japan, which holds US$578 billion of US government debt.

Foreign holdings of US Treasury debt at end-2008 was US$3.1 trillion. That is equivalent of US$10.13 million for every one person in the US based on the US population of 306 million.

US President Barack Obama is depending on China to continue to buy its Treasury bills to ensure the US$787 billion stimulus package is implemented effectively.

Shouldn’t China be buying assets in US companies and US ports rather than Treasury bills?

China also did not fare too well in its equities acquisition strategy. It reportedly lost more than US$80 billion of its foreign exchange reserves after buying into equities just before world markets collapsed last year.

The acquisitions were undertaken by China’s State Administration of Foreign Exchange, which manages the country’s war chest of nearly US$2 trillion of reserves.

Questions arise whether China should further pump-prime its economy by using its large reserves rather than buying more US debt paper and equities. The issue is becoming more urgent as millions of Chinese are made jobless due to the recession.

There are several questions to be raised, according to an economist friend.

Is it the question of China using good money to chase bad money?

Or is this is a prelude to China’s bargaining chip to force the US to further open its markets to China goods?

Or will China use, or be allowed to use, its funds to buy up strategic industries or assets in the US?

The sum of it all is that desperate times call for desperate measures.

There is no way out for China to extricate itself from the US financial quagmire. It has no choice but to continue to support the US economy by buying more of the debt papers.

That is a major concern as for how long can the US economy rely on selling its Treasury bills to finance its looming debt.

Most importantly, the US must set up a framework to reduce its deficit or make known how long it can sustain its economy this way. So far, there is no answer yet.

A major worry in the US and from onlookers is how the funds from the US stimulus package have been used.

For instance, American International Group Inc., under pressure to reveal how it spent billions of dollars in taxpayer funds since its September bailout, said US$105 billion flowed to US states and banks including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG.

According to Bloomberg, banks that bought credit-default swaps or traded securities with AIG got US$22.4 billion in collateral, US$27.1 billion in payments from a US entity to retire the derivatives, and US$43.7 billion tied to the securities-lending programme.

Indeed, China’s future also hinges on the US which is its major export market. But China does not have a say how the stimulus funds are used to prop the US economy. That’s a lot of money which China has in the US treasury bills