Excerpts from
The Congressional Research Service Report

China’s Holdings of U.S. Securities: Implications for the U.S. Economy

The complete report can be found here. http://www.fas.org/sgp/crs/row/RL34314.pdf

Growing Bilateral Tensions over the U.S. Public Debt

Since the beginning of the global financial crisis in 2008, U.S. government officials have increasingly sought to offer assurances to Chinese officials regarding the safety of China’s holdings of U.S. government debt securities and to encourage China to continue to purchase U.S. securities. For example, during her first visit to China on February 21, 2009, Secretary of State Hillary Rodham Clinton was quoted as saying that she appreciated “greatly the Chinese government's continuing confidence in the United States Treasuries,” and she urged the government to continue to buy U.S. debt.26 However on March 13, 2009, Chinese Premier Wen Jiabao at a news conference stated: “We’ve lent a huge amount of capital to the United States, and of course we’re concerned about the security of our assets. And to speak truthfully, I am a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."27 On March 24, 2009, the governor of the People’s Bank of China, Zhou Xiaochuan, published a paper calling for replacing the U.S. dollar as the international reserve currency with a new global system controlled by the IMF.28

The recent contentious U.S. debate over raising the debt ceiling and over how to address long- term U.S. debt issues, along with the downgrade of the long-term sovereign credit rating of the United States from AAA to AA + by Standard and Poor’s in August 2011, appear to have intensified China’s concerns over its U.S. debt holdings.29 Several government-controlled Chinese newspapers issued sharp criticism of U.S. economic policies (as well as the U.S. political system). For example:

• A July 28, 2011, Xinhua News Agency (Xinhua) editorial stated: “With its debt approximating its annual economic output, it is time for Washington to revisit the time-tested common sense that one should live within one's means.”

• An August 3, 2011, a Xinhua editorial stated: “Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders.”

• A Xinhua August 6, 2011, editorial said: “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”

• A Xinhua editorial on August 8, 2011, stated: “The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor's (S&P) for the first time on Friday. China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.”

Some analysts contend that China’s main concern is not a possible U.S. default on its debt, but rather U.S. monetary policies that have been utilized by the Federal Reserve in recent years to stimulate the economy, namely the purchases of U.S. Treasury securities, agency debt, and agency mortgage-backed securities. Such measures, often referred to as “quantitative easing” (QE), have led the Federal reserve to purchase over $2 trillion in U.S. securities since March 2009 in an effort to lower long-term interest rates.32 An August 25, 2011, editorial in China Daily stated that

“China is not worried that Standard & Poor's has downgraded the U.S. credit rating from AAA to AA+. Rather it is concerned about the Fed announcing QE3. If the U.S. administration chooses to make the irresponsible choice of devaluating the dollar further, China would not only stop buying U.S. debt, but also gradually decrease its holdings, which would certainly not be in the interests of the U.S.”

Chinese officials have expressed concerns that actions by the Federal Reserve to boost the U.S. money supply will undermine the value of China’s holdings of U.S. dollar assets, either by causing the dollar to depreciate against other major currencies or by significantly increasing U.S. Inflation.

Some Chinese analysts have argued that the debt problems in Europe and the United States will decrease their demand for Chinese products, and that a depreciating dollar will lower the value of Chinese dollar assets. Thus, they argue, China will need to accelerate its economic reforms in order to boost domestic consumption (including increased imports), lower its dependency on exporting for economic growth, and slow or reduce China’s FX reserves and holdings of U.S. securities. If China consumed more and saved less, it would have less capital to invest overseas, including in the United States. Thus, if the United States did not reduce its dependence on foreign savings for its investment needs (and borrowing for deficit spending), and China reduced its U.S. investments, the United States would need to obtain investment from other countries, and the overall U.S. current account balance would likely remain relatively unchanged but U.S. interest rates would be expected to rise.

A potentially serious short-term problem would emerge if China decided to suddenly reduce their liquid U.S. financial assets significantly. The effect could be compounded if this action triggered a more general financial reaction (or panic), in which all foreigners responded by reducing their holdings of U.S. assets. The initial effect could be a sudden and large depreciation in the value of the dollar, as the supply of dollars on the foreign exchange market increased, and a sudden and large increase in U.S. interest rates, as an important funding source for investment and the budget deficit was withdrawn from the financial markets.

Many analysts argue that heavy U.S. reliance on foreign savings is not sustainable and may undermine U.S. economic interests over time.

I never thought this was real. I always thought everything was a coincidence. The statement from David Rockefeller's memoirs in 2002 is powerful and undeniable.

In a time of universal deceit, telling the truth is a revolutionary act.
-George Orwell

"If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
-Thomas Jefferson 1816

"I am concerned for the security of our great nation; not so much because of any threat from without, but because of the insidious forces working from within."
-General Douglas MacArthur

"This present window of opportunity, during which a truly peaceful and interdependent world order might be built, will not be open for too long - We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order."
-David Rockefeller wrote on Sept. 23, 1994

"The threat of environmental crisis will be the 'international disaster key' that will unlock the New World Order."
-Mikhail Gorbachev

"We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years.
It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries."
-David Rockefeller Banker, Founder & Honorary Chairman of Trilateral Commission, Honorary Chairman of the Council on Foreign Relations. Speaking at the June, 1991 Bilderberg meeting in Baden, Germany (a meeting also attended by then-Governor Bill Clinton and by Dan Quayle)

"In the next century, nations as we know them will be obsolete; all states will recognize a single, Global Authority. National sovereignty wasn't such a great idea after all."
- Strobe Talbot, President Clinton's Deputy Secretary of State, Time Magazine, July 20th, l992

"The drive of the Rockefellers and their allies is to create a One-World Government combining supercapitalism and Communism under the same tent, all under their control....
Do I mean conspiracy? Yes I do. I am convinced there is such a plot, international in scope, generations old in planning, and incredibly evil in intent."
-Congressman Larry P. McDonald, 1976, killed in the Korean Airlines 747 that was shot down by the Soviets.

"The invisible Money Power is working to control and enslave mankind. It financed Communism, Fascism, Marxism, Zionism, Socialism. All of these are directed to making the United States a member of a World Government."
-American Mercury Magazine, December 1957, (p. 92)

"I believe that if the people of this nation fully understood what Congress has done to them over the last 49 years, they would move on Washington; they would not wait for an election....It adds up to a preconceived plan to destroy the economic and social independence of the United States!"
-George W. Malone, U.S. Senator (Nevada), speaking before Congress, 1957

I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men. 
-Woodrow Wilson after signing the Federal Reserve Act.

"The main purpose of the Council on Foreign Relations is promoting the disarmament of U.S. sovereignty and national independence and submergence into an all powerful, One World Government."
-Admiral Chester Ward, former CFR member and Judge Advocate General of the U.S. Navy

"We shall have world government whether or not you like it, by conquest or consent."
-James Warburg, In the Senate Foreign Relations Committee. Feb 17, 1950.

"Let us face reality. The framers have simply been too shrewd for us. They have outwitted us. They designed separate institutions that cannot be unified by mechanical linkages, frail bridges, or tinkering. If we are to turn the founders upside down. we must directly confront the Constitutional structure they erected."
-James MacGregor Burns, Council on Foreign Relations member, 1984

National Socialism will use its own revolution for establishing a New World Order.
-Adolph Hitler

"It is the sacred principles enshrined in the United Nations charter to which the American people will henceforth pledge their allegiance."
-George HW Bush

"... what is at stake, is more than one small country. It is a big idea. A New World Order where diverse nations are drawn together in common cause to achieve the universal aspirations of mankind: peace, and security, freedom, and the rule of law ... [The war in Iraq is] a rare opportunity to move toward an historic period of cooperation. Out of these troubled times, ... our fifth objective, - a New World Order, can emerge: a new era, freer from the threat of terror, stronger in the pursuit of justice, and more secure in the quest for peace ... Now we can see a new world coming into view, a world in which there is a very real prospect of a New World Order. ... We are now in sight of a United Nations that performs as envisioned by its founders."
-George HW Bush

“For more than a century, ideological extremists at either end of the political spectrum have seized upon well‑ publicized incidents to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure ‑ one world, if you will. If that's the charge, I stand guilty, and I am proud of it.” (David Rockefeller, Memoirs, 2002)


Stephen McElroy