Recently, the Chinese government sold some of its U.S. Treasury Bonds, but the dollar-yuan peg hasn't budged. This means that the Chinese government is continuing to pour Chinese savings into U.S. financial assets at the rate of about $400 billion per year.
In order to understand Chinese policy, it is necessary to understand that the Chinese government buys U.S. bonds as part of its mercantilist strategy to keep the dollar high and the yuan low, so that Chinese industries steal market share from American industries and so that China gets America's manufacturing and research and development jobs.
The Chinese government knows that American assets are a lousy investment. It is obvious that the dollar will eventually fall by at least 25% vs. the Chinese yuan. Moreover, the People's Bank of China has had to actively suppress domestic consumption by raising bank reserve requirements in order to get the yuan needed to buy dollars without causing inflation.
A commentary by Brian Miller from today's Globe and Mail explains that when China has been selling U.S. Treasury Bonds, it has been shifting its assets from visible accounts into hidden ones. Here is a selection:
"We do not believe that the Chinese are dumping Treasuries,” Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm, told Associated Press. “What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing.”
In other words, China is moving her money into eurodollar accounts (accounts in European and Asian banks that are denominated in dollars). These accounts usually invest their customers' dollars in U.S. money market funds and other U.S. financial assets, including U.S. Treasury Bonds. Miller says that there is some evidence that the Chinese are presently moving their money toward the longer-term yield end of the U.S. Treasury bond spectrum:
U.S. data show that China reduced its holding of Treasury bills in December by $34.2-billion (U.S.) – a 4.3-per-cent decline – which pushed it into second place behind Japan as the largest foreign holder of U.S. debt.
But the Chinese increased their holdings of longer-term U.S. government bonds, even though rates at the long end of the yield curve are expected to rise.
There is little chance that China will dump the dollar at the moment. America still has lots of industry left that the Chinese government wants to steal. And they are currently working hard to steal U.S. research and development facilities. Crashing the dollar, at the moment, would cause the U.S. economy and U.S. manufacturing to come roaring back, which would wreck Chinese plans.
[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]
Journal of Economic Literature:
[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....
Atlantic Economic Journal:
In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]