While it may not be surprising to some economic experts, many Americans remain apprehensive about the state of Chinese finances and their impact on the US economy.
Many commentators are quick to argue that it is in the best interest of the country for the federal government to encourage China to purchase US Treasury bonds in order to fund national fiscal spending. By continuing to buy up US debt, China acts as a lender in times of need. Fears that this role may be compromised by domestic spending plans being developed in Beijing could be well founded.
Popular attitudes about the economic relationship between the US and China have been seriously misrepresented by those who wish to capitalize on the fears that economic fluctuations can generate. Essentially, China has two trillion dollars invested in reserves. This means that it cannot be used to fund future US deficits. Instead, it must invest in future reserve accumulation of American debt. Finally, the only way that the country can obtain these new reserves is by keeping up a trade surplus.
New reserves may not be used in the Chinese economy. Under the guidelines the country’s currency law, in which the Chinese central bank directly sets the value of its yuan by buying US dollars and selling yuan, cannot convert dollars back into yuan. Chinese exports are vulnerable and could potentially collapse if there were any changes in these policies.
There is a symbiotic relationship between the two major nations, a economic bond created by market necessities if anything. The complexity of these relationships is enormous and the effects of any dissolution could be disastrous for the world economy. It isn’t likely that China will change its US debt buying policies anytime soon. Why would they after all?
Tags: china, bad debt
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