China development assistance should stop

Map of China, by US State Department
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A US Senator said yesterday that China development assistance from America should stop. In fact, America could do better than that.

China development assistance from the USA

Senator Jon Tester (D-MT), now calling for an end to China development assistance

Senator Jon Tester (D-MT). Photo: US Senate

Senator Jon Tester (D-MT) made his case in a letter yesterday to the chairman and ranking member of the Senate Committee on Appropriations. For good measure, he also addressed the chairman and ranker of the State Department subcommittee. Twelve Senators signed the letter. They included both Democrats and Republicans. (Among them: Senators Robert Menendez, D-NJ, and Marco Rubio, R-FL.)

The total amount of aid seems paltry, in comparison to the total State Department budget: $275 million over ten years, including $65 million in China development assistance in 2009 alone. But Tester’s biggest surprise is that China has launched its own foreign-aid program. The spectacle of China taking US taxpayer money to pass on to other countries is worse than ironic. Tester and his colleagues know it. They want their fellow Senators to know it, too.

With more than $3 trillion in foreign exchange reserves and a double-digit economic growth rate, China certainly has the financial resources to forego assistance from multilateral development organizations, which crowds out investment in higher-need countries, and to care for its citizens without relying on US assistance.

Tester did not mention in his letter that China holds more US debt paper (Treasury bills, notes and bonds) than does any other single country. But Jim Webb admitted the irony to Fox News correspondent Neil Cavuto late this morning. Cavuto likened it to “giving a charitable donation to the bank who holds your mortgage.” Webb agreed.

A better idea

Tester’s letter called for stopping the flow of money to China and spending it somewhere else. But the Senate could do better than that. Why not leave the China development cash flow as it is, but send it out as direct debt repayment instead of a grant? In short, redeem some of those bonds!

True enough, the government cannot “call” a Treasury bond or note. To call a bond is to redeem it at once and in full, whether the bondholder wants to present it for payment or not. But the State Department can certainly tell the Chinese that the deal will now be different. They can have their China development assistance funding at the same level. But they must surrender some of the US government bonds they hold to get it.

The government should deal with every country that gets US foreign aid, while still holding US bonds, on the same terms. A borrower does not offer charity to his lender. He pays his lender back.

The money involved might not amount to much. But it’s something. Why should the USA keep the China development assistance policy going, while still owing money to China? Why would any borrower keep doing anything like this?

Featured image: a map of China. Photo: US Department of State.