Could China Wreck the U.S. Economy?
M R Venkatesh says yes. He wrote a lengthy article about it for Rediff about the matter. It’s a long, sometimes complicated but fascinating read.
The recent bailout package being approved in the US Congress needs to be viewed in the context of the spurt in the accumulation of forex reserves of China by about $500 billion in the last six months to about $2 trillion in aggregate.
This gargantuan build-up of forex reserves by China has strangely received very little attention of economists, policy analysts, currency traders and, of course, geo-strategists around the world.
Why is China engaged in this exercise? What could be its implications on the on going global financial crisis? Could China trip the bailout package announced by the US last week? Crucially what are the implications for the existing global order?
What is intriguing in the Chinese forex reserve build-up is that both trade surplus and foreign direct investment account only for a part of this gargantuan pile. After adjusting for all known sources of reserve accretion, experts conclude that approximately an excess of $200 billion could have flown into China as ‘hot money’ — read inexplicable flow of funds — in this period…
In fact, this is the fundamental reason for the burgeoning current account surplus that in turn translates into China’s forex reserves. In the process, over the years, the US has become extremely dependent on China not only for supplying cheap goods but also for the Chinese to fund such imports by parking their forex surplus within the US.
This twin-dependency on the Chinese for goods and money to finance its deficits has always engaged the attention of the US policy framers who till recently were not at all comfortable with this arrangement. And now added to this is the latest aggressive build-up of forex reserves by China surely has the Americans in a bind.
Read the whole thing. It’s a serious problem, deserving of far more attention than it is currently receiving.
Chinese, like people in other Asian economies such as Japen, Singapore, Taiwan, Hong Kong etc. are natural safers because of their Confusian culture. It goes like this: if you want to get ahead, work hard; if you want to be rich, save your money! What China want is a world full of rich countries because the richer other countries are, the more they can buy Chinese products which will make China richer. The last thing China want to see is the US economy fails because 25% of China’s export goes to the US. China’s foreign reserve of 1.8 trillion is actually very small on a per capita bases, about $ 1400 per person compare to Japen’s $ 8200 per person or Singapore’s $ 20000 per person.