Me on China

There is more to talk about than just food:

The trade effects of a revaluation of the yuan are unlikely to be
large, in part because many Chinese exporters specialize in assembly. 
China sends out money buying components like semiconductors and turns
them into finished goods, thereby running a trade deficit with East
Asia.  A new and higher value for the yuan would largely be a wash for
these activities.  With a stronger currency, China would have a harder
time selling its electronic goods, but this would be offset by its
greater purchasing power over the semiconductors.  It would not do much
damage to the Chinese competitive position.

The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury
securities; as of early 2006, the Chinese central bank held up to $470
billion in Treasury securities.  This huge accumulation of relatively
low-yielding assets is the investment strategy of risk-averse
bureaucrats, but it may bring longer-term benefits.  Those assets can
someday be sold or otherwise transferred to underdiversified Chinese
financial institutions.  The accumulation gives the Chinese a stake in
American prosperity and signals that the Chinese are committed to
long-term participation in the global economy.  On the American side,
the Treasury market is more liquid and the budget deficit can be
financed at lower cost.

Here is the full argument.

Comments

I can understand why the Chinese like to have some reserves. The question is why hold dollar reserves that are likely to generate large negative returns? And why so many?

China is about to pass $1 trillion in reserves, maybe 70% of that in dollars. And they're still adding $20-30b per month! The Chinese (along with the Oil exporters) are propping up a BW2 system that hides real weaknesses in the US that will be painful to address now, but even more painful in the future. And while the good times roll in the US, the Chinese people will once again get raked over the coals as their hard-earned reserves are squandered...

And an oink oink oink to all you free lunchers too.

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