If China's financial industry goes in the tank like ours...

…might they call in our loans. And if they - and others - do, what happens next?

(I put this question here because there seems nowhere else for it. Looking for info moreso than debate.)

How do they call in loans? Presumably the loans were made with specific repayment terms. If they (and everyone else) could all demand their loans get repaid now people/the government would simply default on the loans. If the Chinese want their money they’ll have to send their army to collect.

Of course no one will want such a thing to occur as it helps no one.

Presumably, the loans were in the form of T-bills, treasury bonds, and other related instruments. In these cases they will get their money back when the instruments mature. The real problem might occur if they do not re-invest at this point, but I am not sure if this would really be an issue as their is a lot of demand right now for the treasury securities as everything else looks dicey… I am sure someone more knowledgeable than me will be along shortly to correct me.

The problem is not so much that they will demand their money back, as it is they will stop lending us more money. This country has been living on credit for eight years, and if China stops loaning us money, things will go from bad to worse very quickly.

China will send the U.S. a series of increasingly threatening letters marked OPEN NOW and IMPORTANT: FINAL NOTICE. They’ll call several times a day, especially around dinnertime.

We’ll screen our calls, then get a different phone number (in our girlfriend’s name), and finally just skip town leaving no forwarding address.

China has the money because we buy their goods. China has accumulated a large trade surplus, because they buy very little from us, while selling a LOT of stuff to us. So they HAVE to lend to us, to balance things out.
So, OK, the Chinese decide this is no longer a good deal-what do they do? If they stop accepting dollars, their factories close down and they have massive unemployment (somebody say… 'revolution"?)
Frankly, I don’t see what the ruckus is about-if the chinese decide to shoot themselves in the foot, it is OK with me.
We have sufficient domestic suppliers of contaminated milk products, cheap toys, and unsafe electrical goods!:smiley:

We had this discussion recently. For now it works to China’s advantage to keep lending money to the USA because the more American debt they have the more America owes them. (How’s that for a statement of the obvious?) America is pouring borrowed money into a sinkhole and, for now, that suits China just fine. It is in China’s interest to keep lending.

A time will come when China will decide it is in its interest to stop lending and that will weaken America. China will choose that moment when it suits them best. Yes, China will lose some if the dollar is weakened but America will lose much more. And there are times when it is worth losing 1 if it means your enemy/competitor loses 100.

Where did you get the notion that the Chinese would stop accepting dollars?

None of this logically follows from the other. China lends us money to keep their economy going, i.e. we take their money (from them buying T-bills) and we buy their stuff. At the same time, they keep the their Yuan pegged to the dollar, so the dollar has a really tough time rising against the Yuan. In a sense, what the Chinese is doing is exporting inflation, i.e. all their extra money is going somewhere (now to the US). If they stop doing this, then their currency values start to rise and now no one buys their stuff because it’s too expensive. US goods look really great because it has fallen (finally) against the Yuan. China is the one in a more tenable situation, since ultimately they are the ones with the exploding debt.

Then, they better be prepared for double digit inflation and the loss of really their only natural advantage, i.e. cheap labor. China is heavy into manufacturing. When firms can’t sell as much because their stuff is expensive, they will cut jobs. Those people will have a hard time being absorbed into the workforce because their economy is so lopsided. The only real alternative is to go back to fishing and agriculture.

Or they could do what the Japanese did with their trade surplus - buy American assets.

They don’t even have to be IN the US. For example, guess where GM’s most profitable division is located? That’s right. Maybe there will come a day when GM decides it needs the green Yanqui dollars to keep up their executive payroll more than it needs all that fancy American tooling and machinery in Shanghai? Voila.

Also, you need China a lot more than China needs you.

Has there ever been a time in history when your projected scenario has ever played out?

And them buying our assets is actually good for us, because what actually happens is that they get literally invested in our success. We own half of CHina, and they own half of America (figuratively). Everyone is investing everywhere.

As has been said, most Americans have a very distorted view when they think China’s progress is solely or mainly due to USA imports from China. China’s economy is expanding mainly due to internal demand and secondarily to exports, of which exports to America are not the absolute majority anyway. It is foolish to think that America can bankrupt China by just stopping imports. Not to mention that if America were to stop importing from China they will better be ready to start paying much higher prices for stuff.

For now it woks well for China to continue accumulating American debt. It is wise to save for when you might need it or want it. This situation will not last indefinitely though. China’s costs are already rising and will continue to do so and the standard of living improves and as they develop more productivity and higher worth jobs.

The point is that if some day China and the USA were to clash over, say, Taiwan, and, say, the USA were at that point deeply in debt and needed to issue more debt to finance some military adventure and, say, China was holding a metric ton of American debt, who do you think that favors? America cannot continue to just issue more debt eternally. Some day this is going to have to stop and then it will not be nice.

All bubbles end up bursting. Those who are benefitting from the bubble want to believe it will last forever but look at recent events. I have no dobt that the debt being created now will come back to haunt America. All the money poured into the Iraqi desert will be seen as a waste by those who will be called upon to pay the bill. They will think it was all a huge power trip so the generation of their parents could show off a bit and what they achieved was to create a disaster.

Thank you all for your enlightening posts.

Except for the trading zones, China is still a third world country. I think you’re overestimating the Chinese economy. It’s large, yes, but it’s not diversified, and because of its practices it’s more susceptible to market downturns and crippling inflation and is overall a more vulnerable market than the US or any other free trade economy.

China is now the US’s number 1 importer. In 2005, China exported $162.9B, which according to the table listed in the link, amounts to roughly 31% of China’s total exports. The US can do a lot of damage to the Chinese market. The US does not have to stop trade completely to put the brakes on the Chinese economy. The rising yuan is already playing havoc with Chinese exporters, causing Chinese companies and foreign investors to turn to Vietnam for cheap labor.

The exploding debt that China owns is also in the form of CDOs and other mortgage backed securities, as we see now is not trading very well. Additionally, surprisingly, China does not simply print money, but also has a complex (albeit ultimately government controlled) financial system, with similar lending and credit regulations as other 1st world nations. The devalued dollar helps America far more than it helps China and it really doesn’t help a US debt holder.

I think you are underestimating. I live in a fairly low-rent industrial city far from the glamorous coastal cities. Most of the people I know are a generation away from farming villages.

And there is money everywhere. Piles of it. Most of the city feels like a giant shopping mall. Cars clog the roads because there are twice as many on the road today than there were just a few years ago. Most of the apartments I’ve been in look like Ikea catalogs- even the ones in shitty stained up concrete buildings with unlit stairwells. Everyone on the streets is carrying bags of goods- and these goods aren’t all cheap. I make a small but adequate salary as a volunteer and I can’t afford half the stuff my own students can afford. I ran the numbers and even the lady who shines my shoes on the street near the market makes nearly what I make. I have no idea where all this money comes from and who is buying all the stuff I see in stores, but the stores are everywhere, expensive, and jam packed with people buying as fast as they can.

Rural areas are still quite rural, but so were America rural areas until the mid 20th century. No doubt there is a lot of poverty and a lot of stuff I don’t see. But the reports of China’s economic boom are not exaggerated. The money is here.

A situation where America is drowning in debt and cannot get further credit except at huge interest rates or not at all is harmful to America, not helpful. And the way things are going that scenario is becoming more and more possible.

Actually, I think that’d be helpful. A low exchange rate helps us export more, while simulataneously making it easier to pay off debt. We don’t need more credit, and if it becomes scarce, then maybe they’ll actually thin out the entitlements mess and fix the bloody budget!

But anyway, America has awesome credit, and financial companies are right now begging us to take their money. Heck, They recently had a 0% bond issue. That’s right, you could give your money to the feds and they would pay no interest. That’s a damned good deal for us even in this economy!

Except the dollar is as low as ever and America is not exporting much more and is, not only not paying off debt but running up more.

To think America can go on living on credit indefinitely is just silly. Like all bubbles, this one will explode sooner or later and the more time it takes the more painful it will be.

America IS exporting much more. It’s just that a large portion of the exports are cancelled out by increased prices paid for imported oil.

It’s been a year since I’ve been to China. I’ve been there three times total, for about 6 1/2 weeks, so my experience is not as extensive as yours. However, I do make it a point to get around, and I simply disagree that rural China is anything close to rural America. My company has a factory in Guangzhou and one in Shenzhen. Rural America mid 20th century did not have migrant workers sleeping on the street. Rural China, at best (and I mean at very best), looks like 18th century America.

In a city, when you have tens of millions of people around you, yeah, it looks like everyone is doing ok. However, I agree with this article, that there are indeed two Chinas, one that survives (pretty much everyone of the 1.3B people) and one that consumes, which drives its economy, which is like maybe 100 million people. To quote the article, “as far as retailers are concerned out of 1.3B people, 1.2B simply don’t count.” Purchasing power parity in China has been recently revised. They (meaning those that don’t live in the city, which is a vast majority of them) simply can’t afford stuff that even a person classified as poor in the US can afford.