The relationship between China’s export-led GDP growth and America’s over-consumption has shaped the twenty-first-century global economy. But, as growing economic imbalances raise the risk of a financial crisis in China, the Fed must prepare for China to sell off its reserves of US debt in order to recapitalize its banking system.
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.
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.