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China’s Giant Pool Of Dollars

Filed by KOSU News in World News.
March 15, 2012

China’s central bank is sitting on a giant pool of U.S. dollars. It’s the world’s biggest holder of foreign reserves, worth over $3 trillion at last count.

All that money has piled up because every year, China exports more than it imports; it runs a trade surplus.

There are lots of reasons for China’s trade surplus. In the past few decades, China has built an amazing manufacturing ecosystem. It’s become the factory to the world.

But China’s central bank has also given the country’s exporters an extra boost.

It has kept China’s currency artificially weak relative to the dollar, which makes China’s exports cheaper in the rest of the world. It also makes imports more expensive in China.

So keeping the currency weak increases China’s trade surplus on both sides of the ledger — it increases exports and decreases exports. And, year after year, China’s pile of dollars keeps getting bigger.

This has become a problem for both China and the U.S.

It means U.S.-made goods are more expensive in China — which is why you often hear U.S. politicians talking about China manipulating its currency.

What’s more, China’s giant pool of dollars — much of it invested in U.S. Treasury bonds — makes China uncomfortably dependent on the health of the U.S. economy.

“Foreign exchange reserves have exceeded our country’s rational demand,” the head of the China’s central bank said last year. This is an understated way of saying, enough already with the giant pool of dollars.

And, in fact, China has been letting its currency get stronger over the past few years. That has been pinching the nation’s exporters.

“I’m making much less,” Rosalia Yang, whose company sells imitation-wood flooring, told us recently, when we visited her factory outside Shanghai.

But the strengthening currency does have a flip side for people in China: It makes their imports cheaper. As a result, Rosalia Yang is looking to get into the import business.

“We would love to buy products from U.S.,” she told us. “We have seen what is happening in China, so we believe the market needs to turn.”

She’s not sure what she’ll import — maybe medical devices. In any case, she says, the U.S. brand is really strong in China; people associate Made in America with quality.

And as people in China get richer, they can afford to buy more American goods. now. If Rosalia is right — if the market does turn, and China’s imports start to balance its exports — it could be a good outcome for everyone.

The U.S. would sell more stuff to China. Things would get cheaper for Chinese people. And dollars would stop piling up in China. [Copyright 2012 National Public Radio]

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