Myth: China is America’s banker.

Truth: China has bound itself to American economic leadership.

The federal government runs a gigantic budget deficit, which will hurt the economy for the next decade. China buys some of the bonds sold to finance that deficit and has about $800 billion in official holdings of Treasuries, plus perhaps an equal amount in other types of holdings. Even so, the conventional wisdom — that the U.S. needs PRC financing to continue our wild spending — turns out to be wrong. Partly because of the damaging jump in the size of the deficit, Chinese bond purchases have become unimportant. Official Chinese purchases of US Treasury bonds are on pace to fall below $100 billion for 2009, while the federal government deficit soars to $1.4 trillion. Yet U.S. commercial interest rates are lower than at the end of 2008, when official Chinese purchases were equivalent in size to nearly half the federal deficit. Chinese bond purchases no longer seem to matter, if they ever did.

In addition, when Chinese bond purchases were large, it’s because Beijing had no choice. The PRC can take in a great deal of money from the world, through its trade surplus and other activities. The same rules that keep the Chinese currency undervalued means Beijing cannot spend the world’s money at home. Most foreign money disbursed at home by law ends up right back with the central government. That can leave the PRC sitting on a huge pile of dollars and the U.S. economy as the only place big and solid enough to absorb it back. China has not been lending, they’ve been investing, the only way they can.

Finally, the bulk of China’s pile of foreign money can be traced back to the Sino-American trade gap. The PRC relies on exporting to the U.S. market for millions of its best jobs. On exactly the same lines, the PRC ties its currency to the dollar. Linking themselves closely to the American economy that way is also the best choice they have.

In contrast, any American financial dependence on China has almost vanished.