The Buying of America

The recent naval confrontations within international waters between Chinese patrol craft and the US Impeccable, a mapping and reconnaissance vessel, seem to indicate things to come. A Chinese frigate approached the US Impeccable without warning and crossed its bow, passing within 90 metres. Two hours later, a Y-12 aircraft buzzed the ship at low altitude. On Saturday, a Chinese vessel radioed the Impeccable, telling it to leave or "suffer the consequences". The US Impeccable continued on and days later, five small Chinese vessels "shadowed and aggressively manoeuvred in dangerously close proximity" to the Impeccable in an apparent attempt to drive it out of the area. The crew of the US ship responded by using fire hoses to spray the Chinese ships. Any student of history knows that it is these kinds of actions which can cause a sudden conflict. In 2006, a Chinese submarine suddenly surfaced near the American aircraft carrier, the USS Kitty Hawk, after approaching undetected. China also has plans to build its own fleet of aircraft carriers. This may seem harmless but is it?

China is a major economic player. It is no longer a "red chinese menace" although it remains communist in nature, except for the special "economic zones of capitalism", such as Hong Kong. China is outspending the major Western powers in military hardware. But China is simply not building up its military, it already owns much of America and is America's largest creditor for loans, which the US desperately needs. I know, rather scary if you really think about the ramifications!

It now owns nearly $1 out of every $10 in U.S. public debt and this forces the US government to rely on China economically as it tries to cover the $700 billion dollars bailout. China owns so much of America it is too vast to fathom since most of the purchases of treasury notes and bonds are via third party countries. This is granting Beijing extraordinary sway over the U.S. economy. In effect, a economic weapon should they threaten to sell or move out of this part of the US economy. If China decides to move out of U.S. government bonds it could lead a herd of other investors to follow suit. That would drive up the cost of U.S. borrowing, damaging Obama's ability to fund his stimulus package to jump-start the economy. If it sold its investments, interest rates would increase on all loans that America needs.

The economic weapon is deeper. if China continues to invest heavily in the US economy, it actually makes it harder for the US to sell its products overseas because China's purchase of U.S. bonds makes the dollar stronger, particularly against the Chinese yuan, which has been kept artificially weak to boost Chinese exports! Something the US greatly dislikes yet must tolerate because of China's 800 billion of dollars invested in America. The Chinese have influenced the home mortgage rates also by shying away from buying more, Fannie Mae and Freddie Mac (which have now been taken over by the US Government) have had to pay more to borrow and have gotten less for mortgage bonds. This pushes up rates for people seeking home loans just as the U.S. government is trying to bring them down! China has the world's largest cash reserves ($1.9 trillion), and has shed about $50 billion in Freedie Mac and Fannie Mae debt and mortgage bonds.

Unknown to the US public, China is co-financing the $1 trillion annual U.S. deficit and massive bailout with money earned from exports to the United States, which last year imported five times as much as it exported to China.

By China buying bonds in US dollars, it weakens the yuan making goods much cheaper to import to the US than US goods into China. The bottom line to all this is that if China stopped investing in the US, then sold their investments, the US economy would be in cardiac arrest. The US knows this as does China.

Now, China is giving the US government a "warning" to make sure that they make credible decisions with Chinese investments, otherwise, guess what? More disturbing is the fact that the Chinese are even making this threat. This would never had occurred even a few years ago. The Chinese Navy would never had harassed a US Naval ship in international waters moving to within 100 yards in provocative action.

In the 60s and 70s, the cheap products were made in Japan. Now, its China. China maybe using the old marxism, that roughly states that the communists would use the West and "milk them" for all technology and advances during friendly times and when equal to them, confront them and seize the enemy. Unlike the USSR in its heyday, China's economic weapon on the US might be used as a first blow, followed by some sort of military sortie against Taiwan, the oil fields in the South Sea as their demands for fuel outgrow even America's or vice versa. As its military grows, one can see when China may start seizing geographic areas of interest for economic reasons. The question is how can the West confront this? The larger and stronger they become, the more influence they will have on world governments. China's new found wealth is emboldening them, no question about this. Will China turn on America once it no longer benefits them?

China really is a sleeping dragon. But this ain't no fairy tale.

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