Bad News for China = Bad New for U.S.

Despite their massive government and trade surplus, the Times is reporting that China’s Central Bank is short on capital. Having invested large sums of the country’s savings in U.S. backed Treasury Bills, their assets have lost value as they have let the yuan strengthen versus the American Dollar. As the yuan strengthens, the dollar-denominated treasury bills become less valuable. One possible move, of course, would be to shift their investment portfolio towards other foreign securities. We don’t want that. It would cause, in the words of the Times article, “the dollar would likely fall and American interest rates could soar.”

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The other option is to ramp up their securities purchases despite their low rate of return in order to keep the yuan artificially weak. Doing so would keep their exports cheap- but would keep their people from enjoying the fruit of their labor (with, you know, a currency that can actually afford imports). Unfortunately, the debate playing out in China between the Finance Ministry (pro weak yuan) and the Central Bank (pro strong yuan) will have strong implications for the American economy. We’re still number one, but every year our resistance to foreign influence declines…

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