May 03, 2011
This article discusses the possibility that China may allow the value of its currency to rise relative to the dollar. At one point it notes that China has an enormous trade surplus with the current valuation (according to economic theory, a fast growing developing country should have an enormous trade deficit). It then points out that the dollars obtained with this surplus are used to buy Treasury bonds, that “some Chinese argue [are] risky.”
It is worth noting that this is little real risk to China in holding these bonds, they are virtually guaranteed to lose money. There is no way that they can hope to ever sell off their huge holdings without seeing a large reduction in the value of the dollar (and therefore the value of their holdings). The Chinese government is presumably willing to see this loss in order to maintain its export markets in the United States and elsewhere.
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