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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 effe

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.

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.