The Bush Administration has managed to prosecute a very expensive war without making any spending cuts and without any tax increases because the Chinese have stepped up to buy US Treasury notes. The proceeds from these notes fund the war. The debt that we owe the Chinese is staggering.
One of the reasons that we are able to do all of this and still maintain relatively low interest rates is that China has valued safety and stability over all else. Their investment policy results in China owning somewhere between $700 B and $1 T of US bonds.
Things may change soon.
China is to diversify the use of its swelling foreign exchange reserves, a policy change that is likely to mean a rise in investment in overseas securities and more purchasing of foreign technology and raw materials.
Wen Jiabao, the premier, said after a top-level meeting on finance reform at the weekend that Beijing should improve the management of its foreign reserves and explore ways to diversify their use.
The policy switch opens the way for China, which has been largely passive in managing its money, to establish an agency – akin to Singapore’s Government Investment Corporation and other state investment agencies – to handle a portion of its reserves, already the world’s biggest.
China’s foreign reserves surpassed Japan’s last year to become the world’s largest and reached $1,066bn by the beginning of 2007. They could double within four years if the country’s trade surplus continues to expand and Beijing’s currency policy stays the same.
By Richard McGregor in Beijing, Financial Times
The Chinese want a better return than Treasury Notes can offer. They want to invest in their own country and find ways to invest strategically for their country's growth and well-being. I find no fault with that.
But this will have consequences which we cannot now predict. For example, will it result in higher interest rates? Will it result in greater opportunities for businesses that make tractors and other heavy equipment for ag purposes? Will it alter our thinking about our heavy debt?
I don't really know the answers to any of these questions, but I believe that if the Chinese investment committee makes major changes, we are going to really feel it here.
This is a story to keep track of.