'Sino-American Power Play: Why China Has to Buy US Debt'

from economywatch........

"The heart of the issue here lies in China’s market fundamentals. For a large part in the past three decades, China’s economy has ran huge trade surpluses while keeping its currency, the renminbi, severely underpriced. Central government policy goals at promoting inward investments and capital accumulation have therefore been largely successful and these economic strategies have been the key proponents behind China’s outstanding growth and economic progress.

However, restrictions on currency flows have seen China’s stock of foreign currency reserves pile up as China continues to support its artificial price-competitive advantage.

According to Joseph S. Nye Jr., professor at Harvard’s John F. Kennedy School, the Chinese threat to dump U.S. bonds is merely an empty threat.

“In doing so, China would not only reduce the value of its reserves as the price of the dollar fell, but it would also jeopardize U.S. unwillingness to import cheap Chinese goods, which would mean job loss and instability in China,” Nye Jr. said.

With the twin effects of the United States being China’s main trading partner and the U.S. dollar being the main trading currency, China finds itself in a paradox where it has to continue buying U.S. debt in order to keep the imbalances to its advantage"...........READ MORE