China’s Bad Debtor
BEIJING – Before the global financial crisis hit, critics of China’s economic imbalances – its twin fiscal and trade surpluses – mainly concentrated on the misallocation of resources that occurs when poor countries borrow from rich countries at high interest rates and lend the money to them at low interest rates. The great irony of the financial crisis is that the situation has become worse, not better.
China’s foreign-exchange reserves, indeed, are facing a triple whammy: a decline in the US dollar’s purchasing power, a fall in the prices of US government securities, and possible inflation in the longer run.
The bulk of China’s $2.3 trillion in foreign reserves are held not for the purpose of protection against negative external shocks, but as savings in the form of US Treasury notes. China thus needs to preserve the value of its savings.
We hope you're enjoying Project Syndicate.
To continue reading, subscribe now.
Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.
Already have an account or want to create one to read two commentaries for free? Log in