China economyIndustrial activity is down. Retail spending and investment are down. Trade is weaker than expected.

We're talking about China -- the world's once seemingly unstoppable economy. According to official government data released by China last Friday, the turbocharged engine of Asia is starting to sputter and slow down.

Like it or not, the U.S. is inextricably linked to China's success, failure, or stagnation. It's an uneasy relationship, at best.

An Uneasy Alliance

During the Cold War, we used to hear a lot about "mutual assured destruction." This was the idea that both sides knew neither would survive an all-out nuclear confrontation. For that reason, neither would risk launching an attack. So an uneasy status quo, with the U.S. and the Soviet Union perched on the edge of the abyss, held for four decades.

This current, uneasy status quo between the U.S. and China also deserves use of the once-popular acronym for mutual assured destruction: MAD. There's no other way to describe the complicated relationship between the two countries.

The Bank of IOU.S.A.

The U.S. currently has $15.7 trillion in total national debt, and with $1.2 trillion in U.S. bonds, China owns more of it than any other country. But what does that mean, exactly?

Simply put, because our federal government has a difficult time balancing its budget (read: it spends more than it takes in), it issues Treasury bonds to make up the difference. When investors buy Treasuries they're loaning the U.S. government money, and receive interest payments in return. When the bond "matures," they get their full investment back, plus the interest.

Because China produces and sells so much (especially to the U.S.), it needs a place to put the money it earns -- to keep it safe and, ideally, to grow it. You and I put our money in the bank, or invest it in stocks or mutual funds; China invests its money in America by buying Treasuries.

It's safe (the U.S. is unlikely to go bankrupt), and China earns some interest (about 1.84% at the moment). And right now it's China's best investment.

But the relationship doesn't end there.



We Buy Your Products, You Buy Our Debt. Deal?

Aside from being a safe, interest-bearing place to keep its money, when China buys U.S. Treasuries it props up the value of the dollar. And a strong dollar is good for China because it keeps its currency, the yuan, tied in a tight range to the dollar's value. Consequently, Chinese goods stay cheap to American consumers, which is good for China's economy.

This is a mutually beneficial relationship, if not a healthy one. Debt like the U.S. is currently carrying is unsustainable, but we're addicted to it, and China is a primary enabler. If we were a eurozone country, the bond markets would be demanding our head on a platter, much as is happening to countries like Greece and Spain.

Because China and others have always been happy to buy our debt, that's never been an issue. But if the Chinese economy continues slowing, and the government in Beijing has less and less money to invest, who's going to fill in the gap?
Until we get our debt down, and start balancing our budgets, this will remain an unsettling question, especially given China's plans to inject some adrenaline into its own economy.

What Happens in China Doesn't Stay in China

To try to turn its economy around, China has taken the step of easing its domestic banks' lending restrictions. This will put more money into the Chinese economy, with the idea that people will spend more and boost the flagging economy.

But more money in circulation can lead to inflation, which could lead to higher prices for many of the products that American companies are having such success selling there.

Gallery: Widespread Debt: This Is Only The Beginning.
gallery


If Apple (AAPL) iPads get too expensive, Starbucks (SBUX) lattes jump too high in price, or Ford (F) cars get too pricey, Chinese consumption of said products will slow down.

As much as you hear that the U.S.-Chinese manufacturing relationship is a one-way street, America actually sells quite a bit to China. Just as with our debt, we need them as much as they need us.

Motley Fool contributor John Grgurich owns no shares in any of the companies mentioned in this column. The Motley Fool owns shares of Apple, Ford Motor, and Starbucks. Motley Fool newsletter services have recommended buying shares of Apple, Ford Motor, and Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks, creating a synthetic long position in Ford Motor, and creating a bull call spread position in Apple.


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12 Comments

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GymmyKramir

It’s me Gymmy Kramir LIVE on a Special NYC Madd 4 Your Money show coming 2 U from the stalag of Colonel Klinks in za Republic of Germany on this Friday morning !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Boogawagarama
So many CALLz 4 Gymmy 2 make another stop and this Daarck mark is just getting daarcker on me, so I have extended my werld tour (applause & cheerz) !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2 visit
the mark of the Deutsch land and Third Reich. Because
Merkel knows.
Boogawagarama
But what does that mean Gymmy?
Well, It’s all about coffee. It must be Daarck and just the right temperature and Merk knows how 2 Perk.
Hey Merck. This is cool. All the sugar packs say: La Cosa Nostra = SEC + Hedge Funds + Brokerages & Congratulations NYC on your wedding day.
Yes. SS printed those 4 the NYC demon wedding and we have a new beer 2. It’s called NYC Shitzenscheister and the label shows me, Emperor Merkel slapping a swastika on NYC financial PIGG.
Gee Merk. Wonder what happens when u add Daarcks mark on top of that 2 NYC?
Anywaze. Your Economy is moving up Merk. What gives?
Lets go up in #99 Red Balloon Gymmy so u can c za German city and I’ll talk trash while u look at it.
Boogawagarama
Yes. We call it SS. SS monitors Supply of Shorty and if running 2 high they get the Gas Chamber; the same 1 Uncle Adolph used after beer, bratwurst and sauerkraut. U C. Germany reduced the Hedge Funds frum a few thousand 2 just 1. Germany decided not 2 play against itself with hand of the PIGG or we bring in SS. 2 easy 2 cheat and we have supporting data from the nephew of Einstein; Adolph Einstein (every boy in Germany is named Adolph). U C Adolph has found the same people cheating in the economy R the same people cheating on spouse. But now spouse stay home and German Economy on fast track just like me and Uncle Adolph after sauerkraut, beer and bratwurst and I get 2 b famous on Gymmy K show 2!!!!!!!!!!!!!!! And as the niece of Adolph it is my duty 2 claim NYC with the German flag and seEgHILE !! sEEgHILE !! sEEgHILE !!
Wow, thanks 4 that pat on the back Merk and R u stirred up or what? yer a cRaZY.
By the way. How high up R we?
Ah. It will not matter after u take this little piece of psychedelic paper. Printed at the U.S. Treasury 2 and friends of Bernadette. I just can’t remember. Either Warren Buffet left it or it came out of Ghadafi’s stash. Eh, getting old and just 1 final self promoting word Gymmy. It’s getting close 2 re-election and I just want to ask the voters of Germany 2 vote 4 me or
prefer the gas chamber; seEgHILE!! sEEgHILE !!sEEgHILe!!
Boogawagarama MERK.
U got my vote.
And who wood know better about Beer than U Merk and Germany 2 End 2daze show.
That’s where you’ll find me and Daarck 4 the next few hours after we hit the ground.
And then take off 4
ITALY 4 mUNdAy 21, 2012.

May 18 2012 at 9:21 AM Report abuse -1 rate up rate down Reply
1 reply to GymmyKramir's comment
mrspelosi

Dear, I think it is time to cut down on the trips to the liquor store. See if you can wean yourself off the sauce doll. One bottle is bad enough but when you start downing a second one, well that is just shameful. Have you tried getting in contact with your sponsor darling?

May 18 2012 at 6:22 PM Report abuse +2 rate up rate down Reply
thewebdoctorisin

"It's safe (the U.S. is unlikely to go bankrupt), and China earns some interest (about 1.84% at the moment). And right now it's China's best investment."

China has been slowly divesting itself of all its US currency by purchasing companies around the world with it. China's best investment recently is gold resources, mines and contracts for reasons if you don't know it's sad you have this job.

May 18 2012 at 7:00 AM Report abuse rate up rate down Reply
kafienkarl

Russia and China both are tired of using U.S. dollars to buy oil. This is the real reason the U.S. has been struggling for years. Japan is another example of a country that sells products to the U.S. so it can be paid in U.S. dollars to buy/import oil. Well the petrodollar is on its last leg. If the U.S. dollar wasn't weak we couldn't/wouldn't be exporting as much as we are now. There's a lot to this. The party is almost over. The fools that want to blame Obama are being even more foolish. The predictions and dates to forecast the collapse of the dollar have been going on for years. These countries are tired of the good deal we have. When it does happen it will mean inflation like we haven't seen in decades.

May 17 2012 at 10:43 PM Report abuse -1 rate up rate down Reply
kafienkarl

Wall Street and many of the multi-national corporations couldn't wait to be in China 25-30 yrs. ago. During the early 2000's the outsourcing and moving businesses to China occurred big time. We needed so many thought the crap made in China sold by the likes of Wal-Mart for the phony housing economy. China is trying to develop their own economy but it's a huge undertaking. Wages and the cost of living are on the rise in China. Many laborers are working for $1-3 dollars an hour. For many its not enough. This gives us a good idea what U.S. companies that move abroad really want very low wages and no rules. China is implementing a national health care system so the citizens of China will become consumers.

May 17 2012 at 10:04 PM Report abuse -1 rate up rate down Reply
Somey

mrspelosi
In these trouble times we need you back as speaker of the house.

May 17 2012 at 7:20 PM Report abuse -3 rate up rate down Reply
warren

Yes Chinese buy I-Pads,Fords,and lattes but these products were not imported from the US to China.Our manufactures make the products over there and buy them at a profit in China and reimport them into the US and profit again off of rhe same product.Our main exports to China are agricultural and scrap material that rhey reprocess.Their is no way that a Chinese worker could afford to pay the prices we pay for the same products in China so our companies use the profits they earn on the product they reimport to us to subsidize lower prices in China and build market share.Then they write off rhe foriegn taxes on their US taxes and te Chinese government uses the interest on the trade imbalance to further subsidize their growth.American workers are shafted and our multi-national prosper.

May 17 2012 at 3:39 PM Report abuse -1 rate up rate down Reply
GymmyKramir

Boogawagarama
Good Morning Heatemydog!!!
It’s Thursday 5/16/2012
Coming 2 u LIVE frum the Land of the Rising Sun in Heatemydog, China it’s Gymmy Kramir and the NYC Mad 4 Yer Money Show!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! (applause and cheerz).
Signs waving everywhere across China. NYC financial demon 2 b wed aNd there R parties Everywhere. China sez they r in the NYC financial PIGGS bridal party and bring many gifts.
I see this bystander.
Hey, Whatz up?
Hi. I luvs weddings bcause I getz 2 throw this rice away, insteads of using it as celibate herb 2 feed 4 my 51 children at every meal and every day.
Boogawagarama
Alright and mooooooooooving a long
4 All the ladies out there:
Here is the moment u have been waiting 4.
My interview with
Chunglongtung
Heatemydog, Chinese Economix Advisory
“Chung where R u frum?”
I am homegrown frum Heatemydog.
Boogawagrama
Ok , so whatz new longtung?
“Soon Baidu take over Google and merges with BING. ByeByegoogoobing is new website http://www.byebyegoogoobing.com. China will turn NYC into 1 big rice and chicken factory 4 wedding and marriage vows. A world of RICE is so VERY VERY nice. Then yuan bcomes werld currency bcause NYC = PIGG = La Cosa Nostra = SEC + Hedge Funds + Brokerages. Finally, we share NYC PIGG city with N. Korea, Russia, Iran, UK and maybe others. China plant Chinese Flag of Independence in NYC financial PIGG turf and use NYC financial PIGGS in chow mein in new NYC China Town.
Well Thank U longtung. Sounds like a plan. My only advice longtung is 2 always hedge with the anell mustard to glide your assets in2 your best friend Gymmy Kramir’s pockit and account.
Boogawagarama
Well, It is with a tear in Gymmy’s i, 2 sadly say this will EnD tHe wErLd tour and thanks again 4 joining us – it’s been r pleasure. But what a great way 2 END. 2night it’s Daarck Knight, Chunglongtung, and me Gymmy Kramir together 4 an evening. And I’m a monkeys believer now when Daarck sez; “The Midnight is Daarck Knight. There is NO STREET light”.
Everyone; we’ll b signing autographs here, until the anell mustard warms jussssst right and then
it’s time 4 us leave, don’t frown, just put a cocker spaniel down!
as they say here in Heatemydog, cHiNa.
Boogawagarama
As I RIDE on the Chinese Gatling Accupuncture Float in the NYC wEdDinG paRaDE and the NYC financial PIGG float sinks frum treatment, I’ll check out the next update of headline newz TV in Heatemydog, China with the views frum the NYC Ferry.
Now, it’s time 4 us 2 RIDE and RIDE and RIDE
until the chinese sun rises above the NYC Daarckness

May 17 2012 at 1:35 PM Report abuse -2 rate up rate down Reply
1 reply to GymmyKramir's comment
mrspelosi

Oh my how sad. When you fell of the wagon it appears you hit your head too dear. Perhaps you should skip those trips to the liquor store and call your sponsor instead darling. Maybe attend a meeting or two. How unfortunate for you.

May 17 2012 at 7:12 PM Report abuse +2 rate up rate down Reply
pr12235

"Investing in the US is safe, becuase the US is unlikely to go bankrupt"?
The United States is already bankrupt! There is no way the government can ever pay back all the money and they know it. On paper, the US position is worse than Greece...and where is Greece now? In fact, the US has already defaulted on it's loans by paying it back in increasingly worthless dollars. That's why gold keeps going up: it's really becuase the US dollar is going down. Good luck to everyone. This is just the beginning.

May 17 2012 at 1:23 PM Report abuse rate up rate down Reply
2 replies to pr12235's comment
psignspdq

If that's the case, why won't Repubs cut the military? Do we need bases every place in the world? No, not in a day and age with the mobility we have. The mililtary is BY FAR the biggest chunk of the budget. You can't not cut that and ever expect anything to change. But hey, all those neocons need big money donated by military contractors, right?

May 17 2012 at 2:44 PM Report abuse rate up rate down Reply
joethightwad

Bankrupt? Odd you should make that assertion. The first week of each month I go to my local bank and slap down a 30 year old, fully matured Series E savings bond and receive full payment along with accured interest. Hardly the behavior of a bankrupt debtor.

May 17 2012 at 3:06 PM Report abuse -1 rate up rate down Reply