Why should you care what's going on in China? It makes many of the products we buy -- particularly the ones sold at Wal-Mart Stores (NYSE: WMT). And it has been recycling the profits it makes due to its relatively low labor costs into buying American debt. In fact, without its willingness to purchase our Treasury bonds, we would probably not be able to afford the $8.2 trillion worth of bailout plans that we've created so far -- or the additional $20 trillion we might need in the future.
If we were in the ninth inning of this financial collapse, instead of the second, then China's slowdown would not matter so much to our future. But if we need an additional $20 trillion over the next several years to put a floor underneath this economic collapse, we are not going to be able to rely on China to help foot the bill as we have in the last year. That's because China is slowing down; it has been growing at 12% a year for several years in a row, but that rate is likely to slow to at least 5.5%.
That would be a great growth rate for the U.S., but it represents a huge slowdown for China. Forty five percent of China's GDP growth is due to fixed asset investment -- like construction of houses and manufacturing plants. And a big part of that business is steel -- whose prices have lost 36% of their value since the peak, dropping from $768 a ton in June to a low of $490 a ton this month. One steel plant is cutting production by 15%. This means that global suppliers of commodities -- such as iron ore, copper, and cement -- around the world are suffering. What does this have to do with U.S. debt?
China holds $340 billion worth of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) debt, which prompted our bailout. In September 2008, China surpassed Japan as the biggest buyer of U.S. Treasury bonds -- with holdings of $800 billion. But that may change because China just diverted nearly $568 billion to a stimulus program in China. And as global demand slows down for consumer products made in China, its trade surpluses will fall as will the $1.9 trillion pile of excess capital that it has been recycling into our debt.
This means that all the money the U.S. has been shoveling out the door to rescue financial institutions -- the total increased from $7.4 trillion at the beginning of the week to $8.2 trillion this morning thanks to yesterday's bailout plan -- will not be so easy to finance. Even though three-month Treasury bills yield 0.12% now, that figure is likely to rise significantly if Chinese demand drops off as it tends to its own internal concerns, including violent worker protests resulting from rising unemployment, such as the one led by 500 workers laid off at a toy plant.
With the Fed more than quadrupling the size of its balance sheet from $800 billion to $3.5 trillion -- mostly by soaking up toxic waste from those financial institutions -- our national solvency is increasingly tied to China's, making its decline all the scarier.