Economics question

  VNAM75 22:15 20 Apr 06
Locked

Just watched the BBC 1 news about trade between China and the USA. The reporter ended by saying "China owns most of Americas foreign debt, and you're not going to pick a fight with your bankers are you?"

I am very curious as to what this statement means.

  Kate A 22:47 20 Apr 06

It goes along the lines of:

China imports around $50billion worth of US goods
US imports around $300billion worth of Chinese goods
Therefore: US has a trade deficit with China of around $250billion dollars. Any friction between the two countries could jeopardise that trade, leading to possible economic problems in the US.

At least that's how I understand it - I'm keen to hear if I'm along the right lines or if I've got the wrong end of the stick.

  Forum Editor 23:21 20 Apr 06

You haven't got the wrong end of the stick at all. America has for some time being buying far more from China than China buys from America, and it's not just China - America buys vast amounts of goods and services abroad. Go to America and try to buy an American-made TV or HiFi for instance, and you'll get an idea of what's happened. The world's most powerful country is in fact in serious trouble with regard to foreign debt.

In order to raise the money to buy foriegn goods, america has been borrowing more from foreigners (by selling them American bonds) and selling them american assets (U.S. stocks and other property). The result has been a growing annual deficit in what's called the "current account" - the net amount a country owes to foreigners for goods, services, interest and dividends over what is owed by those countries.

The value of the American dollar has fallen considerably over the past five or six years, and that means it takes ever-increasing amounts of money to buy the same quantities of goods, which means it's necessary to sell even more bonds, stocks etc. to fund the differential, which means that america plunges itself into even greater debt.

The countries to which america owes the most are Japan and .......China, and it's China which recently announced (or rather leaked) the news that it is considering a reduction in its holding of US dollar bonds. China is a major funder of US debt, holding about £150 billion in US Treasury bonds, and news of a possible reduction in this holding triggered an immediate drop in the dollar value. Make no bones about it, if China took drastic action to lower its holding it could trigger a major problem for American economic stability, and possibly bring about a deep recession.

THat's the real reason you'll see George Bush entertaining the Chinese in Washington - although he'll pretend that it's to discuss Chinese human rights policies.

I've said it many times in the forum, and I'll say it again - anyone who underestimates the real power of China on the world stage over the next couple of decades is goig to be making a very foolish mistake indeed.

  hzhzhz 23:32 20 Apr 06

Did the Chinese buy UNOCAL and MAYTAG?.

  spuds 13:46 21 Apr 06

In this big wide world, you can never be sure who holds the final negotiation hand. Possibly the peasant in a rice paddy field!.

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