chinas double sided blade

Chinas just about to reach the one trillion (with over 700billion in US bounds) mark in a few months on its reserves
meaning that if it wanted it could screw up the US econnemy big time if it wanted with little effect on it thanks to its trade sur plus

bbc
Foreign currency reserves are generally seen as a good thing - it is the lack of reserves that means that countries might suffer runs on their currency, as Britain did in the 1970s.



But China's surplus is much more than China needs to cover its exports, or pay for its own investments abroad.

And China has mainly invested its foreign currency reserves in long-term US Treasury bonds and other government securities.

Brad Setser, a former US Treasury official, estimates that China now holds $700bn in US long-term bonds, enough to lower US long-term interest rates by 1.5% - which helped stimulate the recent housing boom.

But those holdings are a double-edged sword.

If China attempted to diversify its holdings, it could cause a collapse in the value of the dollar and higher inflation in the US.

That would also lower the value of China's own reserve assets - so China is only slowly moving out of dollars and into other currencies such as the euro.

However, it also ties the fate of the US economy to China.

Originally posted by bodrul
Chinas just about to reach the one trillion (with over 700billion in US bounds) mark in a few months on its reserves
meaning that if it wanted it could screw up the US econnemy big time if it wanted with little effect on it thanks to its trade sur plus

Then why is it a double edged sword? I mean if China could destroy the US economy without suffering the adverse effects of losing the only trade partner that hasn't slapped tariffs on its products then it wouldn't be a double edged sword. But as the article states China has bought these loans to ensure superior market access to the US for its products by lowering the value of the Chinese Yuan to the US Dollar(creating China's trade surplus).

And the value of those bonds is dependent on the US paying them. I don't think we'd feel obliged to the Chinese if China attempted any form of economic warfare against the US. So China could find itself holding a trillion dollars of sweet fanny.

700billion wouldn't kill the american economy. Look at them now. 8 trillion in debt. Money is nothing to a country that can make money appear out of nowhere.