Read China’s Lips

China funded US government spending in recent decades with low-interest loans. But the threat of default may end that free ride. China is the largest foreign holder of US Treasuries and other agency notes, with about $2 trillion invested. US financial woes have prompted China to adjust its growth strategy, explains economist Stephen Roach in an essay for Project Syndicate. Beijing worries about shrinking US markets for its exports, growing risks of US dollar-based investments, and its own imbalances including an undervalued renminbi. China’s five-year plan reveals its intention to reduce dependence on the US and develop its own consumer markets. Such investments will reduce Chinese savings and purchases of US debt, resulting in a declining US dollar and rising interest rates. In 1988, a US presidential candidate used the blunt phrase “read my lips” to insist he wouldn’t raise taxes, but later broke that promise. Roach’s stern essay suggests that China may display more self-discipline in its pledge to reduce US lending. – YaleGlobal