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One day after the Chinese Prime Minister Wen Jiabao snubbed President Obama at the United Nation’s Copenhagen Climate Summit, the Chinese warned the United States that China’s ability to continue buying U.S. Treasury debt was limited.
Zhu Min, the deputy governor of the People’s Republic of China, told the Shanghai Daily that it is getting harder for the People’s Bank of China to buy U.S. Treasuries because the shrinking U.S. current account is reducing the supplies overseas.
This was dire news for the Obama administration that in 2010 and for the foreseeable future will be dependent on China to buy U.S. Treasury debt in order to fund the trillion-dollar federal budget deficits projected over the next decade.
The Shanghai Daily reported that Zhu told an academic audience that it was inevitable the value of the dollar would fall in value given the increasing reliance of the Obama administration on issuing U.S. Treasury debt to finance deficit spending.
“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said. “Double the holdings? It is definitely impossible.”
Zhu’s warning was clear.
“The world does not have so much money to buy more U.S. Treasuries,” he said.
China’s warnings portend that the Obama administration’s determination to expand the U.S. social welfare state will necessarily meet a limit when foreign nations lack the U.S. dollar foreign exchange reserves needed to purchase increasing amounts of U.S. Treasury debt.
Zhu’s comments were a warning to the Obama administration that China does not approve of the large and continuing deficits the U.S. is projecting into the future.
The current account is a measure of a country’s current surplus or deficit in international trade, plus international borrowing and lending, plus transfer payments such as foreign aid.
The largest component in a nation’s current account is typically the balance of trade account.
Specifically Zhu Min was referencing the diminishing magnitude of the continuing U.S. balance of trade with China brought on by reduced demand for consumer goods in the United States.
According to the U.S. Census Bureau, foreign trade division, the U.S. balance of trade with China for the last decade is as follows:
By comparison, in 1990, the U.S. negative balance of trade with China was only $10,431,000; in 1985, the U.S. negative balance of trade with China was only $6,000,000.
This year may end up being the first year in over a decade where the U.S. negative balance of trade with China has been smaller than the negative balance of trade in the previous year.
Thus, while China’s foreign exchange reserves have gained dramatically over time, reaching a current level of $2.3 trillion at the end of September – the largest amount of foreign exchange reserves any nation has ever accumulated in the history of international trade – the rate at which China is accumulating foreign exchange reserves has slowed, reflecting a reduction in the United States’ purchasing of goods from China during the current global economic downturn.
According to the U.S. Treasury, China is the largest holder of U.S. Treasury debt, amounting to $798.9 billion in October 2009, with Japan second on the list at $746.5 billion.
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