ZURICH – The twenty-first-century economy has thus far been shaped by capital flows from China to the United States – a pattern that has suppressed global interest rates, helped to reflate the developed world’s leverage bubble, and, through its impact on the currency market, fueled China’s meteoric rise. But these were no ordinary capital flows. Rather than being driven by direct or portfolio investment, they came primarily from the People’s Bank of China (PBOC), as it amassed $3.5 trillion in foreign reserves – largely US Treasury securities.
The fact that a single institution wields so much influence over global macroeconomic trends has caused considerable anxiety, with doomsayers predicting that doubts about US debt sustainability will force China to sell off its holdings of US debt. This would drive up interest rates in the US and, ultimately, could trigger the dollar’s collapse.