In China, Mortgage Slaves Curse U.S. Debt: World View

The list of trending topics on China’s leading, twitter-like microblog, Sina Weibo, is typically dominated by entertainment news, celebrity gossip and the daily grind. So it was unusual when, on July 7, 2011, news of China’s central bank's quarter-point interest hike went to the top of that list.

No, Chinese microbloggers weren’t rushing to discuss the macroeconomic consequences of the bank’s move. Rather, they were venting about how their mortgages, almost all of which are tied to that benchmark interest rate, had suddenly become less affordable. A Sina Weibo user, QingMu2010, shortly thereafter railed:

Interest rate has risen again. This is the third time and my mortgage payment has gone up RMB 80 per month (US$12.40)… The day that I cannot meet my payments is going to come sooner or later. Brother Salary, when will you learn from your elder brother, Interest Rate?

Brother Salary and Brother Interest Rate are on Chinese urban dwellers' minds these days, especially in light of the rising prices of pretty much everything. This includes, of course, housing. “One who doesn't have a house can’t afford one, and one who has bought a house can’t pay the mortgage!” Tweeted Dragon In Society on Sina. “It’s not easy to become a mortgage slave and one who has become a mortgage slave can't afford the pain.”

Best as I can determine, there are no publicly available statistics on private mortgage defaults in China. There has also been little coverage of this issue in the Chinese or foreign press. Perhaps that’s because there aren’t many private mortgage defaults; or perhaps it’s because those are the kinds of numbers that the Chinese Communist Party would prefer not to circulate. But whatever the reason, public concerns over debt is palpable these days.

In late June, the Party revealed that the post-2008 infrastructure binge that seemed to power much of the Chinese economy through the global economic crisis was largely financed on unsustainable and, in many cases, un-repayable, local government debt. In the weeks since, bloggers, microbloggers, and editorialists have pondered how China –- a developing country, let’s not forget –- became a major creditor to an American government seemingly hell-bent on defaulting on its public debt. For those who self-identify as "mortgage slaves" (or sympathize with them), the ironies are particularly painful.

“In this world, the poor borrow money to the rich,” tweeted Yu Liang, a North American correspondent for Xinhua, the Chinese state news agency. “I have decided that from now on, when Americans smile at me, I will shout at them: ‘Smiling for what! Hurry up and pay back our money!!!’”

Curiously, official voices featured in official Chinese media haven't said much on this subject. Many microbloggers, and a few commentators on established news sites, speculate that they are reluctant to say something that could damage China’s investment in U.S. debt.

On July 19, the Chinese State Administration of Foreign Exchange issued a statement encouraging the United States to take “responsible” policy measures to increase confidence in U.S. government debt and the dollar, but offered no specific criticism. The self-declared government mouthpiece, People’s Daily, in a July 20 editorial, addressed the issue in the context of the Dali Lama's recent visit to the White House:

As the U.S. debt default will certainly cause serious harm to Chinese interests, China has expressed concern about this issue. Obama met with the Dalai Lama at a time when a series of high-level contacts between China and the United States are about to be launched. Therefore, this meeting will certainly have negative effects on the development process of the China-U.S. relations.

But People's Daily has yet to declare an explicit opinion on how America’s political class manages China's finances.

This week, HeXun, a leading financial Chinese news portal, featured a commentary that targeted the China Investment Corporation, which manages China’s sovereign wealth fund, for its caginess on the issue. HeXun reasoned it was due to shame: “Of course, their restrained attitude also reflects China's embarrassing identity as the largest creditor country of America.”

Meanwhile, at East Day, a Shanghai internet portal, Zhang Yunling, Director of the Asia-Pacific Research Institute at the Chinese Academy of Social Sciences, took the more nuanced approach that one would expect from an establishment figure. He suggested that the default risk calls for change in the global economic order:

[W]ill the U.S. use debt default as a threat to put pressure on other countries in the future? At a minimum, this is a huge potential systemic risk in the present international financial system. To shake off the risks inherent in a US dollar system is not only in the interest of creditor countries, but it is also a means for the global financial system to achieve stability and sustainable operations.

The China Securities Journal seemed less concerned. Its peculiar editorial, “No Need to Worry About the 1.15 Trillion US Debt,” tops even the most patriotic American analyst's confidence in U.S. debt. It said:

No matter how great their difficulty is, the [U.S.] never defaulted or breached their promise, even during the Second World War, when they repaid capital with interest on time. Therefore, U.S. Treasury Securities are considered to be the 'most reliable asset' by countries all over the world for their excellent reputation.

It’s awfully hard to find a similar opinion among the Chinese microblogging masses, where there’s flagrant anger at both the Chinese government for funding the U.S. debt and the U.S. government for luring them into such a lousy investment. For example, Sina user An Xinnuoxiao tweeted:

A U.S. debt default has three purposes: first, to reduce the net value of the debt and eliminate China’s ‘U.S. debt nuclear weapon;’ second, to bring the debt crisis to China and drag down the Chinese economy; third, to dismember the euro and dissolve its potential threat.

Plenty of other Chinese microbloggers have a more nuanced understanding of the American political deadlock, although that understanding has done little to increase their sympathy for the U.S. government system responsible it. In any case, for those netizens not latching onto conspiracies to explain a U.S. default, there reigns a sort of gallows humor, as exemplified by this Sina tweet from Bamboo Bear:

Casting aside the problem that China will be the victim, the default on U.S. bonds will become the funniest scene in the economic history of the world. The fire brigade catches fire! A man with a money press says that they have no money to pay their debt … I think it is better to take gold and oil as guarantees, but will the Americans agree with me?

Default risk or not, there’s absolutely zero indication that China’s investment managers have any intention of weaning themselves from U.S. debt in the short-term. Indeed, even as paranoia over U.S. sovereign debt increases, Chinese interest in purchasing U.S. assets –- debt, real estate, and companies –- continues to rise. An absence of viable and transparent investment vehicles in China, combined with the pragmatic risk-taking that’s characterized China’s economic development, seemingly convinced China’s leadership and its business class long-ago that its best bets should often be placed elsewhere.

Chen Zhiwu, a professor of finance at Yale University's School of Management offered this advice to his compatriots back home on Sina: “If the deadlock causes a U.S. bond default their financial markets will be a mess for one or two weeks and you should seize the opportunity to buy U.S. stock!”

A fine sentiment. That is, as long as you aren’t scraping by to find an additional RMB 80 (US$12.40) to meet this month’s mortgage payment.

(Adam Minter is the Shanghai correspondent for the World View blog. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.