| China relies on its ability to sell cheap goods to the world. Problem : the more people buy Chinese goods, the higher the Yuan is supposed to get. Therefore, they would lose their initial competitive advantage, because a higher Yuan would mean more expensive Chinese goods. It's the classic path for any prospering country, at some point it has to become a "normal" rich country, adapting to a lower growth. Solution : China buys a lot of US debt so it can artificially deflates its own currency. Because they sell a lot of Yuans, their currency is deflated = chinese good cheaper to the world = strong demand = especially from the US because of the stronger $, Americans can buy more Chinese goods. You see it's a complex situation, and we can even argue it's a kind of win-win situation because Americans can afford more goods as well. But this strategy is unsustainable in the long run and could damage both countries if the worst case scenario happened. Basically, China has been holding the ball underwater with the consent of the Bush administration, because of the susmentioned "win-win" deal. A lot of economists have been very critical of the former administration because such large amounts of money could put America at risk. Now that the crisis has stroke, this threat is more pertinent than ever. Anyway, the Chinese governement has absolutly NO lesson to give to the Americans in this case, it was entirely their initiative and no one forced them to buy US debt, it was their own strategy, and it didn't come with any sort of guaranty that the $ would remain strong. The American people could blame the Bush administration for letting this situation happen tho, but everybody enjoyed it trough an increase in buying power. |