China's Purchase of U.S. Treasury Bonds Keeps the Dollar Over-Valued
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Wednesday, 04 May 2011 04:55 |
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In an article on China's growing foreign investment the NYT told readers that:
"China is also a major player in the global debt markets, holding about $1.6 trillion in United States Treasury bonds, an investment that helps keep American interest rates low and finances America’s enormous debt."
It would also be accurate to say that China's purchase of Treasury bonds "keeps the dollar over-valued and sustains the enormous U.S. trade deficit with China and other countries."
If China did not purchase these bonds, the dollar would fall against the yuan and other currencies. A lower valued dollar would reduce our imports and increase our exports, moving us closer to balanced trade, increasing U.S. GDP and creating jobs.
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These bonds have to be purchased with dollars. Where does the People's Bank get the dollars? From China's exporters, who it gives RMB to in return for dollars, at the pegged rate. The bond purchase is a sideshow. What is important is that Chinese want to save/receive dollars to begin with.