Did China Steal America’s Stealth Technology?

A brief interlude here as I’d like to comment on a great blog post by the folks over at Wired writing for their excellent blog Danger Room.  They have an entry up asking if the recently revealed J-20 stealth fighter incorporates stolen American stealth technology.They take us back 1999 when the Yugoslavian defense forces managed to shoot down a F-117 Stealth fighter, an incredibly lucky event.  According to Wired, there were reports of Chinese agents immediately scouring the country for pieces of the plane, buying them up from farmers who had recovered them.  Several pieces ended up in a Belgrade museum whose curators insist hasn’t seen suspicious activity or visits.  Wired discusses how the technology was already fairly mature, how the F-117 was eventually retired in short order, and how the J-20 doesn’t look very much like the F-117.  Probably not much copying going on here they tell us.I tend to agree, but for different reasons.  The fighter was shot down at the end of March (the 27th) and a month later, on May 7, the United States accidentally bombed the Chinese embassy in Belgrade.  Most Americans wouldn’t even remember this but almost all Chinese remember and as an expat living in the country at the time, it is impossible to forget.The Chinese went crazy.Immediately, demonstrations erupted across the country, but particularly in Beijing, Chengdu, and Guanzhou whose cities had consulates or embassies.  American personnel, including ambassador James Sasser, were trapped inside the Beijing embassy.  Rioters attempted to burn down both the Chengdu and Guanzhou consulates.  The United States and NATO immediately released an apology and circulated the fact that they were attempting to hit a Yugoslavian warehouse nearby that looked similar, but bizarrely, these apologies were not allowed to be immediately rebroadcast in China.This was China.  You don’t get to demonstrate or riot without the government allowing it to happen.  There were reports of students being bussed in by the government to the US embassy to let loose their anger.  It was declared to be unsafe for Americans to be out in public, the first time this had ever happened nationwide for US Nationals since China reopened in 1980.  International schools and companies closed.  We were told to stay inside and not go out for any reason.For Americans living in China, it was an incredibly surprising incident, and I managed to get involved in one of the scariest situations I’ve experienced overseas by ignoring the warning and venturing out to see what was going on.  While most of the world is annoyed by America today, in the late nineties, particularly in Asia, Americans were extremely popular.  Everyone in China loved Clinton, his policies, our economy, everything.  It was almost inconceivable that Americans could be bothered out in the streets of China.Some pundits explained the riots by saying the Chinese government was concerned that repressing the students would cause them to get out of control, but this doesn’t jive with how China normally views demonstrations.The crux of the issue was that China was ultimately convinced that the bombing was not intentional.  But why would the US bomb an embassy?  What could we hope to gain?  In the aftermath, strange facts emerged.  George Tenet testified that the Belgrade strike was the only one of that war directed by the CIA.  I heard from two different American personnel involved in the military that it wasn’t an accident, and these rumors are still prevalent today.  Another source testified that CIA maps correctly identified the Chinese embassy, which seemed to debunk the flawed cartography defense that was the official US explanation of the incident.  An in-depth investigation conduced by Danish Newspaper Politiken and the UK Observer turned up even more inconsistencies.  And there was still China jumping up and down that it wasn’t an accident for no apparent reason.Eventually, the link seemed to become clear: China had been gathering stealth fighter pieces, boxing them up, and were preparing to send them back for analysis.  The United States’ message to China was clear: welcome to the NFL, and don’t mess with our technology in our warzone.As I said earlier, I agree with Wired that China never got those stealth parts, just for different reasons.

China vs. the United States: What about all this debt?

It’s almost impossible to mention China in a conversation now without hearing about them owning a large portion of our debt.  Based on my own unscientific and anecdotal perception (I asked a bunch of people), most would answer that China owns “most” or “close to half” of our debt, and I’m commonly asked “when I think that Mao Zedong will be on the hundred dollar bill.”Before we begin, I’d like to make clear that I am a fiscal conservative.  I believe the US should not routinely run a deficit, particularly a large one.  I live in a state (Florida) with a balanced budget provision in our constitution and even though it’s ignored from time to time, I think it would be a good thing to have nationally, and I believe it to be extremely unwise to routinely run deficit spending.

One of the best resources for understanding the national debt is, unsurprisingly, the US Treasury.  You can read up to date reports on outstanding debt and its holders here.  Wikipedia has a slightly outdated but directionally graphical correct representation of this data here.  From this, we can see that somewhere around 30% of all US Treasuries are held by foreign and international interests.  The rest are held by insurance companies, other investors, pension funds, mutual funds, and the government itself (mostly the Social Security trust fund).Already, this is probably not the picture you expected.  Less than a third of all US debt held by foreigners.  The treasury helpfully breaks this down further here, listing each country by holdings and the dates of the holdings.  Of that debt, China is indeed the leading holder at roughly 20.8% (as of July 2010), but Japan is right behind at 20.2%, then the United Kingdom at 9.2%, then oil exporters (5.5%), Brazil (4.0%), Hong Kong (3.3%), Russia (3.2%), and Republic of China or Taiwan at 3.2%.

After just a few minutes of basic research, we’ve learned that China has roughly 6% of our national debt under its ownership, and of the rest of the countries on that list, Japan, the UK, Taiwan, and Brazil would be counted in the friendly-to-America column, or at least in the “choose America over China” column.  It can be argued that Hong Kong is essentially China, but it still doesn’t change the general picture at all.China, along with other countries, just doesn’t own that much of America’s national debt.  In fact, I’d say in light of all the political rhetoric, 6% is a shockingly small amount.

Still, lets say that the nightmare scenario happens, things went sour with China, and they wanted to begin flexing their muscle, using our debt against us as a weapon.  What would their options be?

  • They could sell their holdings.  This would immediately depress the value of treasuries and probably cause some amount of alarm.  However, were China to begin selling their nearly 800 billion in treasury bills, the market for these bills would rapidly cause their existing holdings to plunge in value.  In other words, by selling, they’d screw themselves fairly quickly, and they’d be forced to take that money and place it somewhere else.  Where?  The EU has proven recently to be a less than stellar investment.  Their own domestic market wouldn’t be able to absorb a nearly trillion dollar capital injection without being inflationary.  Not to mention that the Fed could simply step in like they did with TARP and buy up the 800 billion dollars that China would sell, at rock bottom prices.  Our allies could also mobilize considerable buying pressure so that their own holdings wouldn’t devalue.  At the end of it all, China would probably lose the most from this maneuver.
  • They could unpeg their currency to the US Dollar. China today artificially keeps their currency pegged at an unfavorable exchange rate (to them) in order for their products to remain cheaper for Americans.  Unbelievably, most of the current US diplomatic effort on economic issues is centered around trying to get China to remove this peg, thus making things more expensive for Americans.  Derogatory terms like “dumping” are used to describe China’s gift of subsidized products to millions of Americans.  By demanding that China unpeg its currency, we’re basically saying “remove your artificial subsidy on goods that middle and lower class Americans predominantly buy, and that will help us.”  Smarter people than I have written on this elsewhere numerous times.
  • Are there other options here? I’m trying to think of them, but the reality is this – Chinese businesses are flush with dollars.  There’s a reason almost all of the countries that are major holders of US debt are manufacturing or commodities export driven (China, Taiwan, Brazil, Oil Nations, and Japan).  They receive dollars for their products, and need to buy materials to make their products.  These materials can and do often come from other economies, so it’s advantageous to use the world’s reserve currency to procure these materials.  Notice how India is absent from the list – they’re a knowledge exporter (mostly services and knowledge work like software), and therefore most of their income is paid in wages to individuals who then spend the cash within their own economy, not paid to other economies to procure raw materials.

If you were to obtain a large sum of money (in the billions or trillions of dollars), you’re going to need to make decisions regarding the investment of that money using long term, macro-level criterion.  Government stability comes into play, geopolitics becomes important, and all of a sudden in addition to a rate of return, you’re faced with the difficult decision of who do you trust with your money – but on a national scale.  If you’re China and you’re looking around the world to invest your US dollars, you can choose Europe, a handful of economies in SouthEast Asia that are just as invested in the US as you and are competitors to yourself, Africa, or South America.  The world just got a whole lot smaller.  In that context, the US is by far the most stable recipient for your investment, and its markets are also the driver for your current economic success.Deng Xiaoping, the former leader of China and the architect of China’s reforms that shifted the country to free-market capitalism, is famous for his quote that China should stick to its economic policies for one hundred years.  China is thirty years in and has already taken enormously expensive steps (subsidizing exports by pegging to the US dollars for example) to ensure stability and continued growth.  Reasons for this are also steeped in history, as we’ll in see future posts.

Sure, China is investing more in Europe, as the recent debt offerings from Spain and Portugal illustrate, but the broader context here is that a global economic downturn hurts China just as much or more than any other economy.  Their domestic markets aren’t big enough or sophisticated enough to sop up the spare manufacturing capacity that would be created by a global downturn.  China’s economic interests are driven by political and historical goals that go unseen by Western economic analysts.

The analogy to this situation is simple:  as a construction company, you build a house, then rent it to a tenant who can also beat you up.  You sell furnishings to him too.  You’ve invested a lot in the home that you build, and all of a sudden, your tenant starts having trouble paying you back.  Unfortunately, the house is so big and lavish that there’s nobody else who can afford it, or if they were to buy it, you’d have to sell at a steep or near-total loss.  What do you do?  You follow the wisdom that banks who own their own mortgages follow: you do what you can to work out a payment plan and look to keep the tenant in the house, while not humiliating him in the process.  This way, both of you make it through hard times, and you can sell him a nicer house when he’s back on his feet in a few years and is looking to upgrade.

China is not about to jeopardize its future by focusing on short term issues and America needs to stop wringing its hands over non-issues.  The problem isn’t China’s holdings (or any other foreign entity’s holdings) of our national debt, the problem is the national debt: it’s us.  It feels a lot better to fear monger, but at the end of the day, we’re the problem.

China vs. the United States

Yesterday I was at the dentist, getting my teeth cleaned, and watching CNN for roughly an hour.  They spent almost the entire time (they did interrupt to let us know that Regis was retiring, sigh) discussing Hu Jintao’s visit to the US, how the Chinese economy is the second largest, and what the goals of the visit would be for both parties.  It was painful, and not because my teeth were getting poked.  The media, most members of the US Congress, and I’d say most of these groups in addition to normal Americans spend significant time talking about China in very abstract, basic, and historically ignorant terms.Here are some statements that are a commonly made with regards to China that I believe most China observers would take issue with, but are accepted as fact by most Americans:

  • China owns most of our debt, and therefore owns America, and therefore will begin to (if not already) influence the United States in ways we aren’t comfortable with, and in ways which would be imposible if they didn’t own so much of America’s debt.
  • China’s military power is a deep concern for both the United States and the West at large, and certainly a threat to East and Southeast Asia.
  • China’s autocratic government coupled with their capitalist economy affords them tremendous advantages to exert political and economic will towards being “the best” in ways the US and the West can’t muster.
  • China must demonstrate that it’s willing to behave responsibly towards the rest of the world and engage at the level of statesmanship that the West has long demonstrated.
  • China’s economic growth will continue unabated for the foreseeable future, and there is essentially almost no risk of a derailment.

There are a few more but these seem to be the ones that most people focus on, and simply put, the feeling is that maybe not now, but in the next twenty to thirty years, the following scenario could play out: China is big, they own our country, they could wreck our economy (either by wielding our debt against us or demolishing our superiority in competition), then kick our butts in a war.I’ve tried not to make these straw men arguments, and over the next few days/weeks I’ll deal with each and provide some counterpoint to each.