January 24, 2005
The Manchurian Candi-debt
By Jim Dallas
Atrios is beating the foreign debt horse again. And this Kos diary seems to make things seem like they're ready to rumble.
My understanding is that the Chinese central bank's motive in buying so many U.S. bonds stems from the peg between the RMB and the dollar, and the likelihood that the failure to prop up the dollar would result in massive unemployment in China (or so I've been told). So it's not so much inspired James Bond-ian evil Chinese scheming (remember Goldfinger - the Chinese trying to destroy the U.S. dollar by irradiating our gold supply!) as it is political realism.
Nonetheless, it seems like we're being driven into a macroeconomic trainwreck by technocrats on both sides of the Pacific.
Posted by Jim Dallas at January 24, 2005 09:57 AM
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It's not just that an artificially low Yuan boosts Chinese exports. It's also the Chinese banking system.
By western standards, almost every bank in China is insolvent, with a massive number of non-performing loans.
The Chinese are making slow movement towards cleaning this up, but if the Yuan were to go up, it would tend to force local interest rates down, and make foreign assets cheaper.
The resulting outflow of capital would likely cause the collapse of the Chinese banking system.
