A Chinese view on international credit flows

It is a well known phenomenon that the Chinese economy buys a significant amount of U.S. Dollar denominated debt every month, partly offsetting Chinese trade surpluses with the U.S. Thereby China supports the status quo of the exchange rate of its, as many argue, undervalued currency. This creates a situation of mutual independence as a necessary adjustment of the exchange rate would hurt both countries. A sharp depreciation of the U.S. Dollar would cause trouble for the U.S. economy in many forms such as increased costs for energy imports and higher finance costs as a result of waning trust in the dollar. For China the problem is simple: their huge dollar reserves (around 2 trillion U.S. Dollar) would decline in value. So far this dilemma is well-known.

However, there is another layer which presents itself taking a Chinese perspective. The bonds Chinese private households, the government, and firms put their money in, yield relatively low interest rates. This is mostly due to the still dominant position of the dollar and the U.S. economy. On the other hand, U.S. companies pour their dollars back into the Chinese economy in forms of investments. Those investments are by no means low-profit investments and generate significantly higher profits. To put it short and sweet, the Chinese lend money to the U.S. at a low interest rate and U.S. firms and investors come back and invest getting a high return on their investment.

Naturally, one might think: Why not leave the money in the country from the start? That is, of course, what Chinese economists try to suggest and shift the investment flows towards domestic investments rather than investing abroad. This will not happen overnight, but in general Chinese economists seem to be often better heard in their country than elsewhere. Some even suggest to try to make the Renminbi the dominant currency, that is to say most debt should be denominated in Chinese currency. That is a far cry from now, but considering the population ratios and the current troubles of the U.S. economy, not impossible in the very long run.