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China’s record US debt sale threatens Western alliance

Vladimir Putin and Xi Jinping meet in Beijing last week. Credit: Getty

May 21, 2024 - 1:00pm

Last week Russian President Vladimir Putin travelled to Beijing, culminating in a widely-covered “bro-hug” between him and Chinese President Xi Jinping. When Russia and China started to deepen their partnership in the wake of the 2022 invasion of Ukraine, many predicted that it would not last because of historical animosities between the two countries. Those voices have been resoundingly proved incorrect by subsequent events.

Western foreign affairs publications noted that the visit had substance, with Foreign Policy remarking that a series of bilateral agreements had been signed during the trip. In fact, reading the original statement published by the two countries — which runs to nearly 8,000 words in English — there is a significant amount of meat on these diplomatic bones.

While the two powers have stopped short of announcing a formal military alliance, they have ramped up cooperation in the military sphere. They also agreed to cooperate on nuclear technology and media influence, and hammered out an agreement on global institutions. Interestingly, the Russian government will promote Chinese language skills among its population while the Chinese will return the favour for the Russian language. Evidently, a deep, interconnected Eurasian alliance is finally coming to pass.

Not by chance, the Chinese have been reportedly offloading American Treasury debt at a record pace. Bloomberg noted last week that in the first quarter of 2024, the People’s Bank of China offloaded a record $53.3 billion of American government debt. Tracking through the changes in China’s asset-holdings, the Bloomberg report hinted at the fact that Beijing might be recycling the money it received from selling the American government debt into gold.

No doubt this dumping of American Treasuries is in part a response to the United States massively raising tariffs on Chinese products of late — including a 100% tariff on Chinese electric vehicles announced this month.

Veteran Wall Street economist Torsten Slok last week highlighted that the Chinese are moving out of the foreign market for American government debt and private buyers are moving in. These private buyers are much more sensitive to market conditions, especially changes in Federal Reserve interest rates, and could dump the debt if they saw rates fall during a recession. “If you have a rising debt level and you have a pretty significant deficit,” Slok added, “then your vulnerability in case of a shock is just higher than normal.”

This in turn could risk a serious fiscal crisis in the United States. Michael Feroli, Chief Economist at JP Morgan, recently said that this could provoke a similar crisis to what Liz Truss’s government faced when she tried to push through unfunded tax cuts.

The global situation is becoming extremely serious. When China and Russia expanded their cooperation and the Brics alliance increased its membership, many commentators simply denied that any of this mattered. It is now becoming extremely clear that these developments matter a great deal — and could soon have profound ramifications for Western living standards.

There are new strategies and new approaches that can be tried as we move towards a multipolar world. But the first step is at least acknowledging the problem before we walk over the cliff into an economic crisis from which we cannot escape.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Graham Stull
Graham Stull
1 month ago

Philip Pilkington has for some time now been sounding the alarm bell on the risks increased multi-polarism pose for Western economies. I think some of his points have merit, but there is still a lot the West can do to insulate itself from these effects.
The first is to safeguard its industrial base, and regear its (young) labour markets towards industrial production. It is still the case that Western economies enjoy a massive productivity advantage over emerging nation rivals, but much of the productivity accruing to the deployment of modern technologies is now in unproductive sectors of the economy. This means stopping offshoring through aggressive trade policies.
The second is to pursue energy policies that deliver cost advantages to domestic industries. Here the US and the EU should be mercilessly self-interested: Whether through fracking, nuclear or some of the much-vaunted ‘clean’ technologies, the bottom line must be a reliable, cheap energy supply to industry.
The third is to address inequality, by easing the tax burden on the productive capital, on labour and on the poor generally, while increasing taxes on unproductive capital and closing tax loopholes on the high end. This will hurt the rich and the superrich, but it will also motivate them to work harder to pay for their yachts. And the situation at present, of staggering inequality resulting in despair for the young and poor, and idleness and sloth for the heirs of the superrich, is a form of economic decay.

Stevie K
Stevie K
1 month ago
Reply to  Graham Stull

Great post.
Your third point on how to address inequality, by easing the tax burden on the productive capital, on labour.. is intriguing. Couldflesh that one out even a little bit?

Graham Stull
Graham Stull
1 month ago
Reply to  Stevie K

Sure. For me, income is productive (because someone is paying you to make something of value to the economy), taxing it slows down production.
Overall, I think reducing the tax burden is a great idea – the superrich don’t really pay taxes on income anyway, so really income tax is just exacerbating inequality. Most government spending is misallocation of private investment.
So we can actually have much lower rates of income tax, and close loopholes in order to encourage the rich to actually pay their fair share. For example, rules around imputed income (from home / other asset ownership; from retained corporate earnings that inflate stock valuations) and generally put an end to tax exemptions for foundations and ‘charitable’ donations.
Doing these things would allow for a very low rate of income tax (5%) with a single (high) exemption threshold that would generate more revenue and be effectively more progressive. A sensible VAT regime would make up the difference, but it should still be possible to cut taxes in half, simply by reducing government waste (which by the way is also inequality-increasing).

Julian Farrows
Julian Farrows
1 month ago
Reply to  Graham Stull

No, thank you. This would still punish the poor, especially retirees and those who have saved and invested wisely in property and stock options.

Peter B
Peter B
1 month ago
Reply to  Julian Farrows

You don’t invest in stock options. You either get them through your employment or you don’t. It’s not an actual investment choice for the vast majority of people.
He’s quite correct. We need to reverse the tax burden so that it falls less on earned income (actual work) and more on unearned income (rents). This all started going wrong (like so much else) around 1997.
And “the poor” don’t have stock options or property. So, yes he’s correct again there – low income taxes are good for the poor.

Dennis Roberts
Dennis Roberts
1 month ago
Reply to  Julian Farrows

I never quite understand the objection most people have to changing the balance of tax away from labour and onto wealth. It’s as though people are so used to the idea that taxing labour is simply how tax is raised that they just can’t visualise an alternative.

Warren Trees
Warren Trees
1 month ago
Reply to  Dennis Roberts

The people most against it lobby very successfully to make sure it doesn’t change. The same is true for the massive amount of money that I sheltered from taxes via NGO’s, not-for-profits and foundations. Peeling back the myriad layers of complexity show that the rich are literally raping the tax payers with massive fraud. And much of it for clandestine purposes such as funding terrorists.

Michael Cazaly
Michael Cazaly
1 month ago
Reply to  Dennis Roberts

It isn’t “labour” which is taxed, it is income, including income produced by, funnily enough, capital. Destroy capital ie wealth (eg by taxing it out of existence) and you will destroy income… and any jobs for labour to actually do because capital is needed to build the facilities where things are made… Then welcome to the reborn Soviet Union, with high living standards for all…

Dennis Roberts
Dennis Roberts
1 month ago
Reply to  Michael Cazaly

For most people income tax is a tax on labour. Labour takes effort – income from capital takes much less effort for the same reward.

No one on here has suggested taxing capital out of existence – it’s a rebalancing. You might as well say income tax will tax income out of existence

Graham Stull
Graham Stull
1 month ago
Reply to  Dennis Roberts

Well said, Dennis.

Michael Cazaly
Michael Cazaly
1 month ago
Reply to  Dennis Roberts

Yes…no one on here but just wait until the politicians start…it’ll destroy wealth like a firestorm because they don’t believe wealth has to be created…just “shared” ie taxed out of existence
And yes..some people don’t work because it isn’t worthwhile

Philip Tisdall
Philip Tisdall
1 month ago
Reply to  Graham Stull

l must respond to your idea of “fair share”. Here in the US, the top 1% pay 40% of income tax, the top 10% pay 70% and the bottom 50% pay <5% of income tax receipts. What is your idea of “fair”?

T Bone
T Bone
1 month ago
Reply to  Graham Stull

I like the distinction between productive and unproductive capital. I would like to see that conversation become serious and rephrased away from whiny, crybully Socialist language about “punishing the rich who don’t pay their fair share.”

Steve Jolly
Steve Jolly
1 month ago
Reply to  Graham Stull

Well said. That’s an excellent summary of the basic populist economic agenda.

Pip G
Pip G
1 month ago

For some time China, Iran & Russia have tried to escape from use of the USD$ as the currency for international foreign trade. The petrodollar started in the 1970s: Oil producers agreed to price oil in USD$; oil exporters built up large balance of trade credits, and agreed to use their USD$ to buy US Treasuries. China followed this as it became the World’s exporter.
This reliance on the USD$ has reduced, and in time it may do so further. It fits with a breaking of Global trade and the establishment of regional blocs.
We cannot predict how the ever increasing Debt issued by the USA will end: can USA print dollars forever? Already we are seeing an end of the artificial low Interest Rates from 2009, which suggests state issued Bonds will carry higher ‘coupons’, with the possibility of issue of more Debt just to pay the interest. Dangerous times ahead?

Liam F
Liam F
1 month ago
Reply to  Pip G

In order for any country to escape $USD debt they would need to replace it with something at least as good. An alternative would need dramatic changes to attract the big flows of capital needed. Ie transparancy, accoutability, free flow of capital in/out, etc.
Whatever ones negative view of US debt, the US only needs to be better than the alternative to remain the worlds reserve currency. No serious govt or corporation will invest big money long term in China , Russia et al when it is quite likely they could lose everything on a whim. (Eg BP)
I’ll get worried about US T-bonds when I see China allowing its currency to float freely, remove capital constraints, respect property rights, protect shareholders, and generally become a free market economy. (Not saying it can’t happen, but not holding my breath )

Mike Downing
Mike Downing
1 month ago
Reply to  Liam F

I agree; it’s all about relative risk for the investor. When the US abandoned the gold standard in 1971, it caused chaos; but less chaos for the US than for their ‘allies ‘ and that gave them a comparative advantage.

The other concerns about opacity and reliability with potential replacements will also continue to weigh heavily in the US’s favour for a while at least.

But in the end, the drift is going to be away from US hegemony in the medium to long term.

Steve Jolly
Steve Jolly
1 month ago
Reply to  Liam F

Aye, the problem with relying on Russia and China in a global system is that they have demonstrated a tendency to use their economic influence much more directly for political blackmail than the US had. It isn’t that the US hasn’t used economic dominance to benefit itself. It has, but it has done so in mostly indirect ways. China and Russia will not be so magnanimous. I’ve said it before and I’ll repeat. There will come a time when many pine for the unipolar era and US ascendancy but most of them won’t be Americans.

Leslie Smith
Leslie Smith
1 month ago
Reply to  Steve Jolly

Yes, look at the anger and hatred directed at Trump when he asked the freeloading NATO members to honor their NATO commitment by paying their agreed-upon contributions. If the USA needs to curtail its expenditures to pay down our national debt, requiring NATO to pay its fair share and perhaps more, since they live in Europe and Americans don’t, we all know the Europeans’ reaction to this demand.

Peter Buchan
Peter Buchan
1 month ago
Reply to  Liam F

This perspective – one that has done the rounds for well-nigh 2 decades now, rests on is the false paradigm that the term “reserve currency” doesn’t exist in the plural form. To reason that, since the development of the modern global economy was built on a series of single “reserve” currencies in the past, this is therefore the only possible model, is inductive. Global geo-political, production and monetary dynamics have shifted tectonically; the reasons are many, but the fact is that Western hegemony over all three spheres is over. Triffin’s Dilemma remains as valid today as when it was originally proposed. 
What many commentators fail to appreciate is that system complexity has grown by orders of magnitude. It is likely – not certain, but likely – that the expectation that failure of the USD as global reserve necessarily implies that it has been replaced by “sovereign currency X” (read: Yuan) no longer applies. More likely is that some hidden minimum threshold now exists below which a) the USD “system” is simply superseded by a constellation of alternatives, of which the Yuan is just one part and b) it is equally likely that, once that threshold is reached, the USD system will break up in a descending cascade. None which is good in the short term, of course.
As for the proposition that a little bit of (rational and strategic) heavy lifting in Westminster could create the conditions for the UK to re-industrialize and balance inequality is a pipe dream – a Schrodinger Kitty: great fodder for the chattering classes, but if ever you actually try and lift the lid the cat will be found to have expired. “Re-industrialization” in THIS era, after THOSE mistakes, within THIS zeitgeist and with THIS youth is a pipedream. Settle in for a bumpy ride.
 
            .

Richard Calhoun
Richard Calhoun
1 month ago

The ‘West’ needs a ‘shock to the system’ to shake it out of its profligate spending of our taxes .. ‘Welfarism’ is destroying our economy and our values.
Maybe Foreign govts selling US treasuries will be the catalyst to bring common sense and responsibility to our political govts.

Peter B
Peter B
1 month ago

“Evidently, a deep, interconnected Eurasian alliance is finally coming to pass.”
More of this rubbish. “Desperate marketing” as Private Eye calls this sort of thing.
China and Russia are natural and historic rivals. It’s quite obvious that China is exploiting Russian weakness for everything it can get.
Meanwhile, China’s spent the last decade or so copying Russia’s fighter jets so it doesn’t need to buy from Russia any more. Allies, he says !
And if China is offloading US debt, so what ? They’re probably taking a loss on it. It’s not a good time to be selling government bonds. And certainly not in those quantities.
The “BRICS alliance” is a joke. India is no ally of China. They have no practical alternative to the US$. Indeed, all their rich people keep their assets abroad in the West and primarily in US$. Watch what they’re actually doing and ignore the words and posturing.

Steve Jolly
Steve Jolly
1 month ago

China is unloading US debt because they know we will dissolve it when they blockade/invade Taiwan. Whatever they have left the day before they make their move won’t exist the day after.

It will be interesting to see if BRICS+ can survive given that Russia/China are trying to turn it into an anti-American alliance. Regional tensions will start to get in the way, particularly if China manages to push through Pakistan’s membership. Their traditional rival, India, would strenuously oppose that and they’re already not on great terms with the Chinese. They’ve also started buying more American weapons and developing their own military industrial complex to decrease their dependency on Russian weapons. Finally, they’ve distanced themselves from Russia over Ukraine, though they continue to buy oil and gas from them. India remained neutral during the first Cold War, which they could easily afford to do since they were not a globally significant economic or military power. This is no longer the case. India is a nuclear power with a growing economy, and they have much better demographics than China does. Which way they fall is quite likely to decide who wins the second Cold War. If I were a leader of Europe or the US, I’d be bending over backwards to improve relations with India and accommodate them in every way possible. Taking the I out of BRICS would make them far less formidable over the longer term.

Warren Trees
Warren Trees
1 month ago

“…unfunded tax cuts.” Complete gibberish. 100% of a government’s revenue is generated by taking money from others. It’s a refund, not an unfunded tax cut.

Michael Cazaly
Michael Cazaly
1 month ago
Reply to  Warren Trees

Quite! It is spending which requires funding, not “not spending”, but language is twisted to produce a specific reaction in the reader.

Bernard Brothman
Bernard Brothman
1 month ago

The United States is the parent that cannot say no to its children, the citizens. In addition to our actual debt and deficit, we have trillions in unfunded liabilities for Social Security (government payments to the elderly) and Medicare (health insurance for the elderly). I am still amazed that China buys all this debt.
If I was an adversary of the United States I would play a long game and wait for this financial train wreck in the early mid 2030s and then take my shots, whether militarily or economically.

Samuel Ross
Samuel Ross
1 month ago

The Chinese Dragon will eventually swallow (or try to swallow) the far east of the Russian Bear. Apparently, this used to be Chinese, once upon a time ……..

Michael Layman
Michael Layman
30 days ago

I will believe it when I see China buying Russian debt(put your money where your mouth is). Everything else is political posturing.

Samuel Ross
Samuel Ross
29 days ago

You don’t have to make your house perfectly secure. .You just have to make it more secure than the guy next door ……..