The influence of China keeping lending the US money
Name: Liu Zhuowen Student ID：S07504
Research paper supervisor:Dr.Seku Conde
Department of education Minzu University of China
2007-2008 Academic Year
Abstract:
Any influence of china keeping lending the US money requires an awareness of their historical and contemporary context. An understanding of the situation and the essential of this action in particular helps to answer the following questions: (1) what is the situation now of Chinese foreign exchange reserve and the US Treasury bond? (2) How does china keep lending money to America, in other words, what is the essential? (3)What is the influence of this action to both China and America? (4) What changes of attitude and of focus or even actions might help the relationship between China and America in the future? The argument is as follows: Some Americans occasionally argue if it has profit or loss that relies on foreign governments which controlling the money so heavily. At the same time, Chinese people also argue that such deal to them whether it is value. Constitutionally, the U.S. Congress has increased national debt limit repeatedly with its own logic, which, absorb and use maximally the international capital. In fact, the huge bond issue, especially overseas bonds, composes a major driving force to U.S. economic growth. Anything else, this essay is based upon literature research.
Key words: China, US Treasury bond, America, national debt, foreign exchange reverses
Ⅰ. Introduction
U.S. trade deficits make the world economic situation further complicated. The United States is the most flexible and adjustive fastest economic entity in the world and its market is full of vitality. Poor countries, such as china, have become the financiers of the United States, which sounds interesting. China holds huge of U.S. treasuries, in other words, the United States owe a huge debt of China. This matter sounds strange. This is because the United States is the richest world's big country; China is still a great poor States.
What is the matter? Do developing countries provide the funds willingly? Why do so many Chinese transport the money to the rich United States, and lend cheap funds available to the private house owners in United States? This essay will draw out some of the reasons and essential for the influence of china keeping lending money to America. It will do so by examining how the mechanism work helps answering the following questions. (1) What is the situation now of Chinese foreign exchange reserve and the US Treasury bond? (2) How does china keep lending money to America, in other words, what is the essential? (3)What is the influence of this action to both China and America? (4) Finally, in conclusion, if this action sustain, what attitudes and actions might help to improve the matters?
Ⅱ. What is the situation now of Chinese foreign exchange reserve and the US Treasury bond?
For China
In the year of 1996, the first time, China has accumulated 100 billion U.S. dollars of foreign assets, mainly held in dollars[1]. By 2001, this number has doubled. From then to now, China's foreign exchange reserve has also increased by six times, becoming the world's largest foreign exchange reserves States. Until now, China has foreign exchange reserves 320 billion U.S. dollars, of which, 80.9 billion U.S. dollars for the purchase of U.S. treasury bonds[2]. According to the statistics, China has become the second largest U.S. treasury holders States, only second to Japan, not to forget that its economic scale is China's nearly two-fold, but ahead of the United Kingdom. China’s investment to the United States is the most conservative one, the mainly products is in the low return rate, such as government bonds and federal bonds, rather than prominent high-risk investment. Because the bonds supported from the U.S. government is considered the world's safest investment. Their interest rates are lower than corporate bonds. In the past two years, their annual interest rate is 4% to 5%, and it can not keep up with the U.S. dollar’s depreciation rate which against the RMB with 5 percent to 6 percent[3].
At on time, national savings is also an indispensable factor to this situation. So far China has the world's highest national savings rate, China's savings rate is 50 percent[4]. It sounds staggering! In the time of peace, any country may not have such a precedent. This does not mean that the average family income is half of its savings. Although China's personal savings rate is so high, most of China's national income is almost invisible, which by the way of "store" preservation as the form of foreign currency in the national Hands. However, because the rapid development of China's economy and the restrictions of consumption, most people are still feel they are become richer.
Judging from these above, we can conclude that this is a classic example that the poor countries support the payment to the rich ones. The one with net loan is the poor China; another one with net borrowing is the affluent United States. Anyone who is sensible and clear may see that who afford the huge economic risk and sovereign risk. Needless to say that, china is the answer with no doubt.
For America
Second, let us look at the U.S., huge budget deficit is a major feature of U.S. economy. At present, the balance of U.S. Treasury bond is almost 34,338 billion U.S. dollars, including 1.0328 trillion U.S. dollars holding overseas. Last year, the U.S. Congress State raise the limited government bond from 59,500 billion U.S. dollars to 64,000 billion dollars, this year further improve it to 73,840 billion dollars, which is the most increase of the history[5].
Relationship
Third to explain is the relationship with each other. China's economy with foreign trade is export-oriented, and it is the leading direct investment destination in the world, so china government owns a great deal of foreign exchange, including capital and current account double surplus. In order to safeguard the foreign exchange stability, it implements compulsory settlement. If there are dollars come in to convert themselves into Yuan, the central bank of china must produce a large number of Yuan instead of large number of foreign exchange; of course, the central bank will also issue central currency and raise deposit reserve. Nevertheless, there is still a large number of surplus liquidity of RMB. Even worse, the result will be the rise of the real estate prices and the bubble of the stock market. For china, buying U.S. treasury bonds is the only choice. In addition to the reduction of domestic inflation, the united States use the money to sell bonds to buy China-made goods, so that china’s factory workers could continue to work, reducing the unemployment rate. At the same time, for china, which buying the U.S. dollars not only for the bonds interest but also hedge against the inflation, after all, the United States is the superpower one. In this way, China and the United State’s economy is two-way, who can not live without each other.
Ⅲ. The essential that China keeps lending money to America
Why does China keep lending money to America? It seems hard to explain, America politicians call Chinese godless communists and all manner of odiously ethnic oppression, but reluctant to admit them to get into the World Trade Organization. At the same time they interfere with all of china’s efforts to buy high tech weapons from Israel and South Africa and European nations. Tracing the history of U.S. dollars - from the hands of U.S. consumers in China's factories, and then return to the U.S. Treasury auction, this situation can easily be answered.
For china, as the current situation, it is precisely that abundant of foreign exchange flow into China supporting the dollar exchange rate stability. Because, in the new process of depreciation of the dollar, China keep purchasing a considerable number of U.S. treasury bonds. And in the past year, the U.S. dollar against other currencies weighted average exchange rate dropped 20 percent, China's net loss up to 10 billion U.S. dollars in direct[6]. As for the Chinese government, the main reason to buy U.S. treasury bonds is as follows: because that china is not focus on the interest rates in investment, but expect to stabilize the national currency against the dollar, in order to protect the country's export industry. Thus, to make the Yuan not increase its value, there will be two main ways. The first way is sell off Yuan on a large scale in the market or buy massive dollars. Looking in this way, this method can not be sustained. The other and the only available way is purchase large number of U.S. treasury bonds annually to prevent the rise in the RMB exchange rate. Such is what happened.
For America, the most direct and effective way for the budget deficit from the government is to issue currency for deficit financing; as for the trade deficit, the United States in order to reduce the deficit, they need to curb domestic demand and depreciate the dollar. Both of the two aspects need the depreciation of the dollar. That does not mean a case of crabs. For [...]
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