Debt Creates a Double Win-or-Lose Bond Between China and America, Even No Chance to Pay Back

That “China owns the U.S. National Debt” has become an universal knowledge for American people, being taught from the lower school to the university. How does this debt relationship work? Will America ever pay off its debt? Why is China willing to keep borrowing to the United States?

The U.S. National debt exceeded $20 trillion on September 8, 2017, surpassing the American gross GDP. Based on the data as of May 2017, China has cut its American foreign debt holding to $1.102 trillion, no longer holding the largest portion. With $1.111 trillion, Japan now has become the No.1 U.S. debt holding country.

Owning U.S. Treasury notes benefits China by increasing the demand of U.S. dollar and so decreasing the value of RMB (as the Dollar-to-Yuan conversion increases) . Thus. Chinese exports are cheaper than those of America. Consequently, Chinese cheap exports gain global market and produce more jobs opportunity for Chinese people. The strategy of devaluing RMB led Chinese economy to grow 10 percent annually for the past three decades.  On the other side, American people can enjoy lower consuming prices and lower interest rates. American economy also grows.

Will America ever pay off its debt to China? Probably never. There are three paths for America to pay back its debt: cutting spending, raising taxes, and boosting GDP. Unfortunately, there is not much in American budget to cut to save $1.102 trillion. It would terminate any politician’s career to raise tax for paying off Chinese debt. Boosting GDP is far more difficult to execute than to say.

However, such double-win situation might not last longer. Since the Chinese government purposefully decreases the value of RMB, the Chinese businessmen are hurt by the interest rate. They start to take loans in dollars or invest outside, leaving cash flowing out of China. Moreover, the Chinese government has asserts its voice in the global market through this low-value RMB process. The Chinese government ambitiously aims to replace RMB to Dollars as the global reserve. On November 30, 2015, the International Monetary Fund awarded the RMB status as a reserve currency. The IMF added the RMB to its Special Drawing Rights basket on Oct 1, 2016. At last, that the American government allows the value of dollar to drop made the debt China holds less valuable.

As China begins to sell parts of debt out, the situation is shifting to a double-lose. American interest rate would rise, and the economic growth slows. The Chinese exports also loses competitiveness.

The anxiety is not necessary. China would not sell all or large amount of U.S. debt at one time because it will drastically devalue dollars and ruin the international market. The American and Chinese economy will still be bonded together through this tremendous debt for a long time.


The Quality of Our Dining Foreshadows the Health of Our Economy

There is an idiom expression in China saying that “hunger breeds discontentment.” It is not hard to understand that people are less likely to spend money on fancy meal and dining environment when the economy is bad. With little money in their pocket, people tend to turn to fast-food or eat at home, and the restaurant business goes down. Thus the Performance of the Restaurant Industry is a significant indicator of the health of our economy.

According to the National Restaurant Association(NRA), Restaurant industry sales constitute 4 percent of the U.S. GDP. The president of NRA Dawn Sweeney said restaurant business also stimulates employment and generates tax revenues. He said, “What’s more, for every dollar spent in restaurants, an additional $2 is generated in sales for other industries, generating even more tax dollars and economic activity.”

RPI Index

The Restaurant Performance Index provided by the National Restaurant Association examines a comprehensive health of the U.S. restaurant industry, including sales, traffic, labor and capital expenditures. If the index value is above 100, it means the American restaurant business is growing during this period of time. An index value below 100 means this business is shrinking.

If we compare this chart to the United States GDP, we could see a general trend that the RPI and GDP have a positive relationship. The higher RPI foreshadows a growing GDP, usually about one year ahead. For example, RPI falled below 100 value after 2007, while American confronted a recession in 2008. While RPI started to recover after 2009, the GDP began to increase after 2010.

American GDP Chart

Stifel analyst Paul Westra and his team believe that “US restaurants are showing signs of heading toward a sector-wide recession.” Restaurant spending is a strong indicator of consumer behaving, which is a large part of American economic growth. It also demonstrates people’s confidence about their money. Stifel’s team said “Restaurants have historically led the market lower during the 3-to-6-month periods prior to the start of the prior three US recessions”. The RPI and GDP charts above has backed up Stifel’s statement.

The RPI Index for 2017 is pretty close to the value of 100. Westra said, “restaurant performance this year, particularly in the second quarter, is shaping up to look pretty similar to the second half of 2000 and the first half of 2007 – the periods that immediately preceded the last two U.S. recessions.” If the history repeats itself, it means 2018 might become the beginning of another U.S. recession period.