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Dealing In Dollars

May 12th, 2010

China’s currency is pegged to the U.S. dollar, according to Zachary Karabell, because when the planned economy began to liberalize, the dollar was “the most important avenue of access to the U.S., the world’s most vital and dynamic economy.” He’s got something there. Really. Another line from the WSJ opinion piece that grabbed my attention: “Because much of global trade is conducted in dollars, especially Chinese trade, governments and institutions throughout the world have little choice but to invest in U.S. assets.”

Now, those are two different ideas. On the one hand, China works with U.S. dollars because, like much of the rest of the world, it finds that it has “little choice.” On the other, China’s decision to link with greenbacks — and now to accumulate them in great wh2volumes — has something to do with Beijing’s desire to associate itself with “the world’s most vital and dynamic economy.” In other words, it’s an automatic, economic response, but at the same time there is also a prestige element involved.

I’m suddenly reminded of a real estate deal: At the end of 2009, a group of investors from China acquired the White House Theatre in Branson, Missouri, for $354 million. This was no small transaction, and you really have to wonder how profitable show business is in “The Show Me State.” I may be wrong, but I don’t think there would have been nearly as much investor interest in this property had the theatre been of a different architectural design. The symbolism was not lost on the China Daily anyway, which ran the headline, “Chinese Company Takes Over White House Theatre.”

Just as some in China may fantasize about a “take over,” officials in Beijing derive at least some psychological satisfaction from owning a significant chunk of the American economy (vis-à-vis U.S. dollar-denominated assets). American pundits have looked at massive foreign reserves in China and speculated about what the country might do with them one day (one possibility: “dump” them). Like that theatre in Missouri, there may be no point beyond the symbol of the thing.

While on the issue of foreign reserves, I’d like to correct a misconception, this notion that an “American spending spree” is to blame for the accumulation of now over $2 trillion dollars in China. The Atlantic’s James Fallows has been on the beat for some time, and in one article written last year, he suggested that Nouriel Roubini buys into this line of thinking:

Chinese commentators blame American “overborrowing and excess” for dragging them into a recession. However, [Roubini] states that “even they realize that the very excess of American demand has created a market for Chinese exports.” He adds that although Chinese leaders “would love to be less dependent on American customers and hate having so many of their nation’s foreign assets tied up in U.S. dollars,” they’re now “more worried about keeping Chinese exporters in business. . . .”

Like nearly everyone else on the topic, Roubini exclusively ties demand from American consumers with U.S. dollar accumulation in China, and yet the U.S. takes in only one-fifth of all that China exports!

Other countries have trade imbalances with China, too, and importers from around the world — the other four-fifths — are often paying for China goods with U.S. dollars. These other economies have collectively contributed significantly to the build-up of U.S. dollar-demoniated assets in China, a point often missed in the discourse.

Karabell’s piece is worth a read, if only for this reminder, that the whole world deals in dollars.


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