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I have always wondered about this. They essentially improve their country by financing our buying. Why don't they simply buy directly? Could they not instead pu

I have always wondered about this. They essentially improve their country by financing our buying. Why don't they simply buy directly? Could they not instead put that excess money into building things they desperately need, like roads and schools? Investing in a first world infrastructure would stimulate growth at home and lessen their reliance on our consumers (whose buying habits have recently become rather fickle) and our Treasury. The second part may be more important too, with our country hurling toward a Social Security meltdown. Our debt as a percentage of GDP might be low now (relative to Japan) but check back in 20 years. I'm not an economist, but I'd love to hear from some why I'm wrong (which I'll assume I am).

newt0311 18y ago
Right now, the major barriers keeping China's capital in China are actually chinese regulation and china's economic growth in that order. China has very strict capital regulation on how money can be moved around across borders. Also, so far, the Chinese govt. has only been interested in holding on to US treasuries so that capital is effectively out of circulation. Lastly, even if some chinese citizen is allowed to invest in foreign infrastructure, why would they when the chinese infrastructure is experiencing faster growth? Still, once these regulations prove too onerous to maintain (which they will) and once China's economy stabilizes, we will suddenly find that half the US is owned by China and that will cause the labor markets to shift again possibly moving production back to the US and away from China. Still, thats ~20-30 years away and who knows what else might happen in that time.
fauigerzigerk 18y ago
They have been building a lot of infrastructure but I think they were simply at capacity. I mean they had more than 10% GDP growth for years. There are only so many engineers and skilled workers. Increasing demand further would have caused even greater inflation and more social unrest than they had anyway. But what you suggest is exactly what they should and probably will do now.
baddle 18y ago
China relies on its ability to sell cheap goods to the world. Problem : the more people buy Chinese goods, the higher the Yuan is supposed to get. Therefore, they would lose their initial competitive advantage, because a higher Yuan would mean more expensive Chinese goods. It's the classic path for any prospering country, at some point it has to become a "normal" rich country, adapting to a lower growth. Solution : China buys a lot of US debt so it can artificially deflates its own currency. Because they sell a lot of Yuans, their currency is deflated = chinese good cheaper to the world = strong demand = especially from the US because of the stronger $, Americans can buy more Chinese goods. You see it's a complex situation, and we can even argue it's a kind of win-win situation because Americans can afford more goods as well. But this strategy is unsustainable in the long run and could damage both countries if the worst case scenario happened. Basically, China has been holding the ball underwater with the consent of the Bush administration, because of the susmentioned "win-win" deal. A lot of economists have been very critical of the former administration because such large amounts of money could put America at risk. Now that the crisis has stroke, this threat is more pertinent than ever. Anyway, the Chinese governement has absolutly NO lesson to give to the Americans in this case, it was entirely their initiative and no one forced them to buy US debt, it was their own strategy, and it didn't come with any sort of guaranty that the $ would remain strong. The American people could blame the Bush administration for letting this situation happen tho, but everybody enjoyed it trough an increase in buying power.
jganetsk 18y ago
The simple answer is, they don't have a choice. Some number of dollars flow into their country every year. Some number of dollars flow out. The difference effectively ends up in the hands of the government. They have to do something with it... because if they do nothing with it, they are effectively exchanging Chinese goods for nothing more than cheaply printed pieces of paper. They government can't spend US dollars inside of China. The only thing they could do is buy American exports, and American assets. If China were somehow to launch a stimulus plan that was fueled by American production, than that would have the effect you are suggesting. They could have Americans come over and build their roads and schools for them, with American materials. They would improve their infrastructure and we would get our money back. But this is impractical, and China gets the long-term benefits, not us. In fact, we get screwed in the long-term, because the return of all those dollars to America would cause inflation.
- mattmaroon 18y ago
  That's silly. They could certainly spend them in China. Many people there would happily accept US dollars. That's why they have so many of them in the first place, business selling products to Americans. And there are always ways to exchange. All investing them does is get them even more US dollars. If the problem is that they can't spend US dollars in China, how does using those US dollars to collect more US dollars help at all?
  - jganetsk 18y ago
    The reason any government would want to build a foreign currency reserve, as I've stated in another post, is to help mitigate a currency crisis. In the case the Renminbi has a large drop in value, they would start pumping dollars in and pumping Renminbi out. By decreasing the supply of Renminbi, and giving folks a supposedly more stable currency to hold onto, they can fix a currency problem. If the Bank of China were to spend US dollars domestically, it would be exactly equivalent to printing Renminbi and spending it. It would be just like a stimulus plan. There's nothing different. Remember, Bank of China must print all the Renminbi necessary to keep the exchange rate at the peg. So watch this: 1. Chinese government spends 100 million USD for public works project 2. Businesses receive 100 million USD, want to convert it to CNY, bring it to USD-CNY exchange market 3. Government prints CNY to soak up 100 million USD We are right back to where we started, except now there is more CNY in circulation. Now if we relax the assumption in step 2 that businesses want to convert to USD upfront, we still have the same problem, because it just delays the conversion. While USD is in circulation, there will be some converted to CNY at every transaction (for wages and taxes and things like that). If the government wanted to enact a stimulus plan, and I think they already did, then they should just do it in CNY. Note: China does not maintain a strict CNY-USD peg. CNY is pegged to a basket of currency.

newt0311 18y ago

Right now, the major barriers keeping China's capital in China are actually chinese regulation and china's economic growth in that order. China has very strict capital regulation on how money can be moved around across borders. Also, so far, the Chinese govt. has only been interested in holding on to US treasuries so that capital is effectively out of circulation. Lastly, even if some chinese citizen is allowed to invest in foreign infrastructure, why would they when the chinese infrastructure is experiencing faster growth? Still, once these regulations prove too onerous to maintain (which they will) and once China's economy stabilizes, we will suddenly find that half the US is owned by China and that will cause the labor markets to shift again possibly moving production back to the US and away from China. Still, thats ~20-30 years away and who knows what else might happen in that time.

fauigerzigerk 18y ago

They have been building a lot of infrastructure but I think they were simply at capacity. I mean they had more than 10% GDP growth for years. There are only so many engineers and skilled workers. Increasing demand further would have caused even greater inflation and more social unrest than they had anyway. But what you suggest is exactly what they should and probably will do now.

baddle 18y ago

China relies on its ability to sell cheap goods to the world. Problem : the more people buy Chinese goods, the higher the Yuan is supposed to get. Therefore, they would lose their initial competitive advantage, because a higher Yuan would mean more expensive Chinese goods. It's the classic path for any prospering country, at some point it has to become a "normal" rich country, adapting to a lower growth. Solution : China buys a lot of US debt so it can artificially deflates its own currency. Because they sell a lot of Yuans, their currency is deflated = chinese good cheaper to the world = strong demand = especially from the US because of the stronger $, Americans can buy more Chinese goods. You see it's a complex situation, and we can even argue it's a kind of win-win situation because Americans can afford more goods as well. But this strategy is unsustainable in the long run and could damage both countries if the worst case scenario happened. Basically, China has been holding the ball underwater with the consent of the Bush administration, because of the susmentioned "win-win" deal. A lot of economists have been very critical of the former administration because such large amounts of money could put America at risk. Now that the crisis has stroke, this threat is more pertinent than ever. Anyway, the Chinese governement has absolutly NO lesson to give to the Americans in this case, it was entirely their initiative and no one forced them to buy US debt, it was their own strategy, and it didn't come with any sort of guaranty that the $ would remain strong. The American people could blame the Bush administration for letting this situation happen tho, but everybody enjoyed it trough an increase in buying power.

jganetsk 18y ago

The simple answer is, they don't have a choice. Some number of dollars flow into their country every year. Some number of dollars flow out. The difference effectively ends up in the hands of the government. They have to do something with it... because if they do nothing with it, they are effectively exchanging Chinese goods for nothing more than cheaply printed pieces of paper. They government can't spend US dollars inside of China. The only thing they could do is buy American exports, and American assets. If China were somehow to launch a stimulus plan that was fueled by American production, than that would have the effect you are suggesting. They could have Americans come over and build their roads and schools for them, with American materials. They would improve their infrastructure and we would get our money back. But this is impractical, and China gets the long-term benefits, not us. In fact, we get screwed in the long-term, because the return of all those dollars to America would cause inflation.

mattmaroon 18y ago
That's silly. They could certainly spend them in China. Many people there would happily accept US dollars. That's why they have so many of them in the first place, business selling products to Americans. And there are always ways to exchange. All investing them does is get them even more US dollars. If the problem is that they can't spend US dollars in China, how does using those US dollars to collect more US dollars help at all?
- jganetsk 18y ago
  The reason any government would want to build a foreign currency reserve, as I've stated in another post, is to help mitigate a currency crisis. In the case the Renminbi has a large drop in value, they would start pumping dollars in and pumping Renminbi out. By decreasing the supply of Renminbi, and giving folks a supposedly more stable currency to hold onto, they can fix a currency problem. If the Bank of China were to spend US dollars domestically, it would be exactly equivalent to printing Renminbi and spending it. It would be just like a stimulus plan. There's nothing different. Remember, Bank of China must print all the Renminbi necessary to keep the exchange rate at the peg. So watch this: 1. Chinese government spends 100 million USD for public works project 2. Businesses receive 100 million USD, want to convert it to CNY, bring it to USD-CNY exchange market 3. Government prints CNY to soak up 100 million USD We are right back to where we started, except now there is more CNY in circulation. Now if we relax the assumption in step 2 that businesses want to convert to USD upfront, we still have the same problem, because it just delays the conversion. While USD is in circulation, there will be some converted to CNY at every transaction (for wages and taxes and things like that). If the government wanted to enact a stimulus plan, and I think they already did, then they should just do it in CNY. Note: China does not maintain a strict CNY-USD peg. CNY is pegged to a basket of currency.