Silence of the Mainland – US default & Chinese T-bond holdings

Sociologists call Mandarin Chinese a “high context” language to indicate that there is more to the message than just the words being spoken or written. You have to pay attention to the situation, environmental factors and history to understand the real meaning.

Sometimes, you have to listen to what they are NOT saying.

And right now, China is saying less about the state of US fiscal policy than at any time since March 2009 – when Premier Wen publicly expressed his worries about the health of Treasury bonds.

Maybe China has tremendous faith in the democratic process. Maybe China trusts its good friend the US of A. Or maybe China has already received guarantees from the highest levels that they will continue to be paid in full in the event of a US default.  To understand China’s silence, you have to understand who sets the priorities in the event that a default means that the US can’t meet all its obligations. The US Department of the Treasury.

Stakeholder analysis: When analyzing any negotiation you start by identifying who the players are – who may win and who may lose. The stakeholders in any negotiation about the way that scarce US assets get allocated are easy to identify – you just have to look at where the money goes. According to the Bipartisan Policy Center (, the biggest payees are:

    • Interest on the debt ($29 billion)
    • Social Security ($49.2 billion),
    • Medicare and Medicaid ($50 billion)
    • Active duty troop pay ($2.9 billion)
    • Veterans affairs programs ($2.9 billion)
    • Defense vendors ($31.7 billion)
    • IRS refunds ($3.9 billion)
    • Food stamps and welfare ($9.3 billion)
    • Unemployment insurance benefits ($12.8 billion)
    • Department of Education ($20.2 billion)
    • Housing and Urban Development ($6.7 billion)
    • Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion)

That breaks down into 3 or 4 big stakeholder groups (depending on how cynical you are)

    1. China (the largest overseas buyer of US T-bonds) and other overseas debt holders.
    2. Military (soldiers – not defense contractors)
    3. US middle class (and those hoping to stay in the middle class)
    4. Wall St. (Wall Street interests align with bondholders (including China) and defense contractors. Food stamps, Dept. of Justice & Social Security – not so much.

So what impact will that kind of stakeholder analysis lead to? Here are some ideas:

Negotiating behavior: China
China favors quiet, behind the scenes dealmaking whenever possible. Students of Chinese diplomacy have gotten spoiled with free access to a bounty of information and data over the last 20 years. Those of us who have been watching China for a bit longer still remember stories of analysts sitting on a hilltop outside of Beijing counting locomotive coal cars to gauge PRC economic activity – because that was the only data publicly available.    China’s default setting for negotiation transparency is that less is best.  The PRC understands the value of secrecy, and they know the power of propaganda. The fact that they have practically stopped making public statements about US treasuries means that they have already made their deal.

Negotiating behavior: US
Secretary of Treasury Geithner has been in the public spotlight long enough for us to draw two important conclusions about his negotiating behavior. 1) He won’t stand up to China. (His office is probably the only organization in the western world still officially maintaining that the RMB is not a manipulated currency, despite the fact that Treasury is required by law to evaluate China’s forex policy twice every year). 2) His go-to solution for just about any problem is to squeeze the US middle class. He’s already bailed out Wall St., AIG, and GM at the expense of the US taxpayer (i.e.: the rapidly shrinking middle class), and there’s no reason to think he’s going to start thinking outside the box anytime soon.

Bottom line: Foreign bondholders (including China) will get paid on time, every time. US middle class will pay now and pay later – default or no. So while the USA’s slow-motion self destruction will be a disaster, those with interests in China can at least take solace from the fact that bond holders will fare the least-worst of anyone.

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