The twenty-first-century economy has thus far been shaped by capital flows from China to the United States – a pattern that has suppressed global interest rates, helped to reflate the developed world’s leverage bubble, and, through its impact on the currency market, fueled China’s meteoric rise. But these were no ordinary capital flows.
They came primarily from the People’s Bank of China (PBOC), as it amassed US$3.5 trillion in foreign reserves largely US Treasury securities.
Much has been said about the fact that a single institution wields so much influence over global macroeconomic trends has caused considerable anxiety, with doomsayers predicting that doubts about US debt sustainability will force China to sell off its holdings of US debt. This would drive up interest rates in the US and, ultimately, could trigger the dollar’s collapse.
But selling off US Treasury securities, it was argued, was not in China’s interest, given that it would drive up the renminbi’s exchange rate against the dollar, diminishing the domestic value of China’s reserves and undermining the export sector’s competitiveness.
To describe the symbiotic relationship between China’s export-led GDP growth and America’s excessive consumption, the economic historians Niall Ferguson and Moritz Schularick coined the term chimerica
In 2009, these distortions led Ferguson and Schularick to forecastChmericas collapse a prediction that seems to be coming true. With the reserves’ long-term effects on China’s internal economic dynamics finally taking hold, selling off foreign-exchange reserves is now in China’s interest.
They came primarily from the People’s Bank of China (PBOC), as it amassed US$3.5 trillion in foreign reserves largely US Treasury securities.
Much has been said about the fact that a single institution wields so much influence over global macroeconomic trends has caused considerable anxiety, with doomsayers predicting that doubts about US debt sustainability will force China to sell off its holdings of US debt. This would drive up interest rates in the US and, ultimately, could trigger the dollar’s collapse.
But selling off US Treasury securities, it was argued, was not in China’s interest, given that it would drive up the renminbi’s exchange rate against the dollar, diminishing the domestic value of China’s reserves and undermining the export sector’s competitiveness.
To describe the symbiotic relationship between China’s export-led GDP growth and America’s excessive consumption, the economic historians Niall Ferguson and Moritz Schularick coined the term chimerica
In 2009, these distortions led Ferguson and Schularick to forecastChmericas collapse a prediction that seems to be coming true. With the reserves’ long-term effects on China’s internal economic dynamics finally taking hold, selling off foreign-exchange reserves is now in China’s interest.
