Reflections on a Wandering Life.....

Thursday, March 24, 2005

Yesterday, Richard Holbrooke was on Dialogue. Yang Rui asked him about the potential sell off of U.S. Treasury bills by China, in their attempt to gain Euros. Holbrooke responded that since China enjoyed a $100 billion trade surplus with the Americans, it would not be very nice for them to do this. I was a bit taken aback by this appeal to courtesy in a situation where so many billions of dollars are at stake. As the dollar continues to fall, it is not surprising that countries like China would like to exchange their Treasury bills, which have a diminishing worth, for something which would be more likely to hold its value. What Holbrooke should have said, is that dumping T-bills will cause the dollar to fall, which would also cause the RMB to fall, since the value of the Yuan is pegged to the dollar. Of course, China can get around that by floating the RMB, but they have always refused to do that, because it is the artificially undervalued RMB that makes Chinese goods so cheap for the Americans, and has motivated so many American companies to outsource their manufacturing to China. So China clearly has an interest in keeping the dollar high, because that is the only way to retain the value of the RMB relative to other currencies without unhinging the RMB from the dollar. Still, China is intent on building their relationship with Europe, because although much of China's wealth right now is coming from business with the Americans, they do not want to be dependent on America.

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