David Prosser: China holds the trump cards in any showdown with the US

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Outlook The timing of Chinese President HuJintao's arrival at the White House yesterday was rather neat. Just as the television cameras began beaming pictures of Mr Hu glad-handing well-wishers in the White House gardens round the world, the Treasury published data that makes one wonder about the long-term relationship between the US and China – and what might happen in the financial markets should it ever deteriorate.

China is by some margin the biggest buyer of American debt. It owns $900bn of US Treasuries – $1 trillion if you count Hong Kong's holdings – which makes it the key investor. Were the US's biggest foreign creditor to start selling meaningful numbers of its Treasury bonds – for financial or political reasons – it would do real damage.

That US Treasury data reveals that this is what happened, albeit to a limited extent, in November, when China sold more than $11bn of US debt. The sell-off followed several months in which China had added to its holdings, but nonetheless fuelled gossip that it might now be considering taking a more diversified approach to its investments overseas.

In fact, it would take a fall-out of spectacular proportions to prompt China to dump its portfolio of Treasuries. The panic on world markets that would result from such a spectacular vote of no confidence in the US economy would be disastrous for it. So too would a collapse in the value of the dollar, one likely result, with Chinese exports to the US trashed.

Still, even a hint from theChinese that they have now bought as many Treasuries as they want would be dangerous, with the US continuing to rack up borrowing in order to support its faltering US economy. If China isn't going to pay for the rising US deficit, who is?

European nations, struggling with a debt crisis of their own, are not in a position to support the US with huge bond purchases. The oil-rich states of the Middle East are less fiscally constrained but already have big holdings of Treasuries and would be nervous about adding to them substantially. Japan and the rest of Asia could not be relied upon either.

US Treasury officials have already begun to talk about how they might persuade American savers to invest more in their own country's debt and the Federal Reserve would probably also step in as a buyer of last resort. Maybe American banks might be forced to invest too.

All of these sources of finance combined, however, could not replace the Chinese investments of recent times indefinitely. And the sheer scale of China's investment in American debt gives it huge power. For all the demands on President Obama to condemnChinese human rights abuses or exert concessions from it on the value of the remnimbi, it is now China that holds the whip hand in this relationship.

Cables released by WikiLeaks record Hillary Clinton expressing frustration last year to the then Australian Prime Minister Kevin Rudd about the US's ability to negotiate with China. "How do you deal toughly with your banker?" she is supposed to have said. Quite.