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Home Publications Blogs Beat the Press If China Moves Away from Holding Dollars Then It Will be Doing What Bush-Obama Requested

If China Moves Away from Holding Dollars Then It Will be Doing What Bush-Obama Requested

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Tuesday, 15 October 2013 05:03

The Washington Post had an article reporting on a commentary from a Chinese government owned news outlet that implied the country might move away from holding dollars. The article should have pointed out that such a move would be consistent with the publicly stated demand of both the Bush and Obama administrations that China stop "manipulating" its currency.

The way that China would "manipulate" its currency (keep its price down against the dollar) is by buying up huge amounts of dollars. If it sold dollars then its currency would rise against the dollar. That would make Chinese imports more expensive for people living in the United States, causing us to buy less of them. It would make U.S. exports cheaper for people living in China, leading them to buy more U.S. exports.

This change could go far toward reducing the U.S. trade deficit, especially if other developing countries follow China's lead as they have in the past. The result would be millions of new jobs and also an important boost to wages. In other words, if China follows through on the path suggested in this article it would be good news for most of the country. Importers like Walmart and companies that have established production facilities in China, like General Electric, might be less pleased.

Comments (7)Add Comment
factotum
written by xteeth, October 15, 2013 6:23
Sometimes though, the selling of lots of something results in a cataclysmic decline in that thing's value. What you seem to be saying is that they would be able to sell off their trillion or so dollars without the value of the dollar going beyond its actual value.
...
written by dax, October 15, 2013 6:42
I think the American viewpoint can be characterised best by, "Be careful what you wish for."

At the moment the Chinese are shipping hard consumable goods to the US in exchange for bits of paper. If they stop doing that, the US will feel a lot poorer. The result for the Americans will be more work, less consumption. IMHO the rest of the world will end up a lot happier than the US.
Zero real interest paid to the Chinese.
written by Ralph Musgrave, October 15, 2013 10:41

Dax,

You’re right. But look on the bright side: the US has spent ten years getting real goods off the Chinese on credit and has paid a zero real rate of interest to the Chinese (the rate of interest on Treasuries is about equal to inflation in the US). The Chinese are bound to wise up some day and realize they’re on a hiding to nothing.
There is a good reason why they call it 'an exorbitant privilege'
written by Jesse, October 15, 2013 11:41
Having the world's reserve currency has been referred to as 'an exorbitant privilege.' Some might contest that privilege, along the lines of Triffin's Dilemma.

I think it is important to remember that the reason why China has been holding dollars is because it has been the world's reserve currency since the end of WW II and the Bretton Wood's agreement.

China holds dollars in part to manage the value of their currency to the dollar, there is little doubt of that. But one of the reasons they do this is because it has been the benchmark.

China and the rest of the BRICs have been fighting the US dollar regime for a number of years, because holding the reserve currency brings a certain power which the US has not been shy in using. The Anglo-American banks have been fighting any changes to this for some years now, as can be seen in the discussion over the constituent components of the SDR which are heavily weighted to the West.

Change is in the wind. I think underestimating or ignoring its implications is probably going to be viewed in retrospect as one of the great mistakes in economics.

I am continually surprised at how few otherwise well-informed American economists understand money and its vital relationship to trade.
"Be careful what you wish for."
written by David, October 15, 2013 1:56
Dax wrote, "At the moment the Chinese are shipping hard consumable goods to the US in exchange for bits of paper. If they stop doing that, the US will feel a lot poorer."

Think about it. Chinese workers struggle with deprivation and work their fingers to the bone to send us salad shooters we send them "bits of paper"??? Why on God's green Earth would they do that, why would we expect them to, and why would anyone expect such an arrangement to continue?
Chinese US treasury securities value per capita.
written by John Wright, October 15, 2013 2:56
Per the treasury.gov, Mainland China holds 1.2773 trillion dollars worth of US treasury securities.

At first glance, this appears as a lot of paper wealth.

But if you divide by the Chinese population, 1.344 billion, it is $950 per capita.

The Chinese may now have a problem with unrealistic expectations in their large population, and $950/capita isn't a lot of banked capital for improvements for roads, schools, hospitals and infrastructure.

If there is more worker unrest, the leadership might decide to use the US treasury portfolio to buy some worker peace.

But on a per capital scaled basis, this can only go so far.

China is in a difficult position, an increase of the Yuan relative to the dollar should decrease demand for their workers' output AND will drop the Yuan value of their treasury portfolio.

Maybe they can ramp up internal demand to keep their factories and people busy.

I do not see China in an enviable position as the USA buys hard merchandise and outsources industrial pollution to China with "we can make more" US dollars.

What? Are there no other nations will to employ there people
written by Auburn Parks, October 15, 2013 3:06
by selling goods and services to the largest single market on earth? And would there not still be a preponderance of large businesses still looking to minimize labor costs and looking to produce goods in these other countries, not just China?

The obvious answer to both these questions of yes. Even if, and that is a huge if, China lets their currency raise in value, making their exports more expensive, those jobs are not coming back to the USA. It simple arithmetic, businesses will always try to minimize their costs and maximize their profits. The global race to the bottom certainly wouldn't end just because China adjusted its economic and monetary policies. There is only one long term solution to full employment in this country, and its the dollar issuer (aka the Federal Govt) buying up all the unemployed labor in some fashion. Either through a B.I.G. or a job guarantee where they fund the states to offer employment programs to everyone who wants a job. Charities and non-profits would love the extra help as long as they didn't have to foot the bill. There are always productive things to be done, and there is only one entity, that issues the money and so can do it, the Federal Govt.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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