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April 29, 2009

Why does China pile up on US treasuries?

Knowledge@Wharton has an article on some of the possible reasons.
China may also be accumulating massive amounts of foreign reserves as a result of the Asian Economic Crisis in 1997, when it watched the IMF impose strict conditions on bailout recipients. "In my view, that's a major contributor" to China's ballooning reserve of foreign exchange, says Allen. "I think most Asian countries looked at what happened and decided that they hadn't been treated fairly. So that's why they have been accumulating trillions of dollars in reserves."

China's trade surplus could swell to $325 billion this year, an ING Group economist told Bloomberg on April 23. According to Bloomberg, China's currency reserves fell $32.6 billion in January, $1.4 billion in February, then went up $41.7 billion in March.

But a lot of China-watchers assert that China purchases U.S. Treasuries as a way of manipulating its currency. "The way the Chinese manage the value of the yuan is through buying and selling dollars," says Wharton professor of business and public policy Howard Pack. "They have been intentionally incurring these export surpluses, so they have too much foreign currency. When they buy U.S. Treasuries, it keeps the value of the yuan low relative to the dollar. That enables Chinese exporters to sell at relatively low prices to the U.S."
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in