China’s Concerns

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The recession occurring in the United States has lead to financial distress in many other countries over seas, but no country is more intertwined with the US economy than China. In a recent article published by MSNBC, China’s vice governor of the People’s Bank of China discussed the rising fear looming over failing U.S businesses. China is Washington’s biggest foreign creditor, holding an estimated $1 trillion in U.S. government debt. Investing in US treasury bills is

“an important component part of China’s foreign currency reserve investments, so as an important component we are naturally relatively concerned with the safety and profitability of U.S. government bonds.” 

People’s Bank of China Vice Governor Hu Xiaolian said at a news conference on Monday. Concerned about the rising debt to fund Washington’s enormous stimulus package, Hu apparently aimed this statement at the fear of inflation and the weakening of the U.S dollar.

The implied warning to Washington by China’s leaders was excessively blunt. Don’t devalue the dollar through reckless spending, such as the massive stimulus package. Premier Wen Jiabao’s message is unlikely unheard at the White House, which responded by reassuring that there is no other safer investment in the world than the United States. In reality, the U.S  is counting on Beijing to aid in coming up with their stimulus package through purchasing U.S. bonds. When asked about the level of concern over U.S treasury bills, Wen responded,

“Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

After reading about China’s concerns I began to wonder what would happen if the U.S dollar value did decline. What if would couldn’t honor our treasury bills and Chinese investments? What affect would this have on countries outside of the U.S and China. My worst fear looking at this situation is a strained relationship between China and the U.S, which happen to be the two most powerful countries in the world. Both countries rely on each other financially and that alliance has helped both countries prosper immensely. Hopefully with a little help from the class a clear picture could be drawn about the repercussions of a relationship collapse between the U.S and China.

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6 Responses

  1. […] Bloginization created an interesting post today on Chinaâ […]

  2. I’m not sure if the relationship will collapse, rather I am more inclined to say that the tides of power are showing signs of shifting. What does this mean for Americans? It means our fine wine and cheese parties may not be as fine.

  3. Maybe we will have Tsingtao and Dimsum parties.

  4. What are the ways that the Chinese-US alliance has helped both countries?

    I think you do a good job reporting this. But to be clear, China is worried that excessive borrowing with push up inflation in the US. The assets they hold are valued in dollars so they will be worth relatively less.

    They are not worried that the US will not pay.

    And, they are basically asking the government to contain inflation even if that means higher unemployment or other hardship for its own citizens.

    Would the relationship sour? GOdd question.

    I suppose one consequence is that China simply would not but more treasury notes or bills for us to fund our deficit. Then we would have to offer them at higher interest rates until someone bought them, making the debt bigger. That could get ugly for US and Obama administration.

    On the other hand, what is considered safer investment these days for Chinese government?

  5. This is definitely a different aspect to the economic crisis that I didn’t even consider. I think what would worry me the most is if we lost ties with our most important ally that it would transfer similar feelings to other countries as well, almost like a domino effect.

    Reflecting on Jordi’s remark, I definitely think the relationshsip would sour if inflation got too out of control. China would stop funding our deficit and find other countries to tie with. This would create such a huge problem for the United States and I hope that we never have to see that day.

  6. At this point, the Chinese and our economies are so closely intertwined that neither country can afford for the other to fail. China has always had the ability to think much longer term than many other countries, and has waited for centuries to emerge as the global economic giant that they have become. Therefore, they will at all costs ensure the success and prosperity of their economy and country as a whole…and hopefully not at the expense of the American economy.

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