Moving out of US Treasuries would harm China's economy
Letter to the editor

Article Highlights

  • Cutting back its lending to Washington would not appear to be in China’s own economic interest.

    Tweet This

  • China is the world’s largest holder of US Treasuries and as the principal financier of the US external deficit.

    Tweet This

From Dr. Desmond Lachman.

Sir, One can certainly empathise with Chinese frustration, as well articulated by David Li, about the US Congress’s very poor handling of the US budget deficit and debt ceiling issues (“Beijing should cut back its lending to Washington”, October 16). However, Mr Li’s call for China simply to cut back on its lending to Washington would not appear to be in China’s own economic interest.

As the world’s largest holder of US Treasuries and as the principal financier of the US external deficit, any decision by China to diversify out of US Treasuries would have a major adverse impact on both US bond prices and the US dollar. By so doing, it would cause large losses on China’s massive dollar holdings, which is the very thing that Mr Li is trying to avoid by suggesting that China diversifies out of the dollar.

Of equal concern to China should be the consequences of any such decision on the rest of the global economy. A shift out of dollars towards the euro would almost certainly result in a further sharp appreciation of the euro. This would seem to be the last thing that an enfeebled European economy needs right now and it could very well trigger a renewed intensification of the euro sovereign debt crisis.

If China seriously wanted to reduce its dollar holdings, it should seek to do so through a co-ordinated effort with the US to redress the underlying saving and investment imbalances that give rise to the need for China to continue accumulating dollars. This would require a serious effort by the US to reduce its budget deficit. However, it would also require substantive measures by China to promote domestic consumption as well as to permit a greater appreciation of its currency.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

Event Registration is Closed
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.