In December, a Chinese company called the Lenovo Group announced that it would purchase the computer hardware operations of American economic icon IBM for $1.25 billion. Soon after, news broke that China National Offshore Oil, a state-owned company, was considering purchasing U.S. giant Unocal. The reactions of American observers ranged from a frantic, somewhat xenophobic fear of impending Chinese economic domination to business-as-usual complacency.
Unfortunately, embracing either of these extremes will hinder a constructive American response to the challenge of growth in the developing world. Broad-based prosperity in China—and everywhere else, for that matter—could provide huge economic benefits to us. Yet, while not every new report of Chinese success signifies bad news for the United States, there are times when China’s economic interests will clash with ours. As we move into a new era of China/U.S. economic relations, the challenge for everyone will be to distinguish between the good news and the bad.
Perhaps what is genuinely the worst news is the $140 billion trade surplus China ran with the United States in 2004. This imbalance is a direct result of the Chinese government’s policy of pegging the value of its currency (the yuan) to a low level vis-à-vis the dollar. For the United States, this currency peg makes Chinese imports cheap and U.S. exports expensive, so the former surge while the latter falter. Whenever market forces threaten to correct this imbalance by bidding up the value of the yuan, the Chinese monetary authorities swap yuan for dollars (or dollar-denominated assets) on world markets, bidding down the price of the yuan, and bidding up the price of the dollar. This intervention has resulted in Chinese authorities accumulating over $500 billion in reserves. The extra demand for dollar assets (especially Treasury bonds) has kept U.S. interest rates lower than they would otherwise be.
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