Hong Kong has been known for being the buyer of many American treasures and bonds in previous months. Such actions have threatened the domestic currency of China. That is why the Chinese government has decided to sell all American and foreign bonds to save their economic situation.
China has lent a great number of sums to the USA supporting their economic situation and keeping American securities. As the result, Chinese reserves became falling in previous months but the situation is saved and it is noted that in March the reserves have increased. The rise of reserves from $32,6 billion in January to $41,7 billion in March is explained by the slowing of capital flight. Nevertheless, many experts consider this process to be in favor of the USA. According to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy” (Bradsher). That is why the USA is in a more profitable position than China. Many private investors bought American bonds with the hope to avoid global financial troubles. The main worry of the Chinese government is that the American economic situation is on the brink of inflation and as the result, the price of American bonds falls which is not profitable for China that has bought a lot of American bonds.
This capital flight is a very cunning policy of the USA. Predicting the inflation, they begin to sell their bonds and appeal to other countries to buy them. The American government aims at stimulating their economy and the capital flight is a good stimulant in this case. On the other hand, the slowing of capital flight by the Chinese government is considered by the American government to be deliberate revenge for that. According to the economists “there is no sign that the Chinese government had deliberately throttled back its purchases of overseas bonds to punish the USA” (Bradsher).
Although there is the risk of inflation and the Chinese government may suffer from the consequences of its exports, but if the American economy is rekindled China will have a lot of profits from its investments. Nevertheless, the Chinese government has slowed down its investments to save the future of its economic situation. On the other hand, the slower rise of Chinese foreign currency reserves does not influence the economic situation in the USA. The Chinese should buy foreign bonds sending money out of the country instead of buying the same bonds from the Chinese companies and individuals. China’s response to selling US bonds is considered to be an attempt to maintain the exchange rate at a fixed level as far as the surplus of dollars in China has overturned the position of its native currency.
This situation is the demonstration of miscalculation of the Chinese government. They wanted to realize a profit buying American bonds but instead of it they are in an economically difficult situation and they have to take measures to slow American capital flow and save their economy. On the other hand, the Chinese government has found itself in the American trap of a deliberate capital flow which was caused by the signs of the approaching inflation. The Chinese government may only hope that the slowing of purchases of the U.S. and other bonds may save the current situation.
Works Cited
Bradsher, Keith 2009, China Slows Purchases of U.S. and Other Bonds. Web.