Saturday, April 4, 2009

How will China spend their U.S. Dollars?

Paul Krugman writes in the New York Times

In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets.


It's an interesting article. He doesn't give any suggestions for China to get out of this mess. This is how he concludes the article:

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.


I have seen elsewhere that China is expected to start buying commodities with all of their excess Dollars. I don't know if they are expected to just speculate, or if they will actually start buying and receiving commodities. If they start on their campaign for electric car production, maybe they will again start importing lots of iron ore.

That would certainly be welcome news for international shipping, especially dry bulk carriers.

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