Should We Worry About The Chinese?
Talking about the current accounts deficit in recent days, I've noticed a lot of scare-oriented commentary about the fact that the Chinese government owns a big chunk of our currency. And fair enough: It's a scary-seeming thing. But it's worth saying a couple of things about this. The first is that most of our government's debt is held domestically, as this chart shows:
And even given that foreign countries hold a minority of U.S. Treasury debt, the Chinese only hold a minority of that minority:
And in reality, the situation is a lot trickier for China than it is for us. The economist Charles Lieberman has a nice column explaining why:
Like it or not, the Chinese are stuck with a simple and stark investment choice, accumulate dollar assets or allow their own currency to appreciate to reduce the trade surplus that is helping their economy develop. They can play around the edges and buy some euro-denominated assets or commodities to deploy some of their surplus, but those options are fairly limited. The rhetorical question, what will we do if the Chinese stop buying Treasuries is best answered by the conclusion that the Chinese have nowhere else to go unless they are willing to allow a much slower pace of development of their domestic economy. Given that Hobson's choice, they will continue to buy dollar assets, even if they object to it periodically. And they do this strictly out of their own self interest, not out of compassion or sympathy for U.S. policy needs.
In other words, Beijing's appetite for dollars is a development strategy. If their purchases stop, so too does the rapid pace of their development, as their exports become pricier and thus less competitive on the international market. And in a country as large, as poor, and as unequal as China, rapid growth is a necessity, not a luxury. Their economic equilibrium is a lot more fragile than our economic equilibrium. And both countries know it. Which is all to say that though there are a lot of things worth worrying about right now, the Chinese abandoning our currency isn't really one of them.
Posted by: umesh409 | June 16, 2009 11:53 AM | Report abuse
Posted by: Dellis2 | June 16, 2009 12:44 PM | Report abuse
Posted by: albamus | June 17, 2009 7:13 AM | Report abuse
The comments to this entry are closed.