China discusses bloat in its U.S. dollar reserves

Section:

By Keith Bradsher
The New York Times
Sunday, February 26, 2006

http://www.nytimes.com/2006/02/26/weekinreview/26bradsher.html?
_r=1&pagewanted=all&oref=slogin

HONG KONG -- China has such a huge stash of other countries' money
that it could, in theory, hand out bonuses equaling half a year's
wages to all 770 million of its famously low-paid workers.

The country will soon release statistics showing it has passed Japan
as the biggest holder of foreign currency the world has ever seen.
Its reserves already exceed $800 billion and are on track to reach
$1 trillion by the end of the year, up from just under $4 billion in
1989.

But China, it turns out, has held a similar position before.

The current pile, much of it invested in Treasuries and mortgages on
American homes, is a result of China's selling more goods than it
buys, and of foreign money pouring in for the building of factories,
apartment towers, office buildings, and shopping malls. China is not
alone; oil exporters are also piling up cash and trying to figure
out what to do with it, leading to disputes like the one over a
Dubai company's effort to run cargo terminals at American ports.

History offers parallels to the yawning United States trade deficit
and the resulting accumulation of dollars in China. China sells to
American companies almost six times as much as it buys, but this is
not the first time China has been an export powerhouse. Ancient
Rome, for example, found that it had little except glass that China
wanted to buy. Pliny complained about the eastward flow of Roman
gold along the Silk Road in exchange for Chinese silk.

Long-distance trade collapsed during the early years of the Dark
Ages. But through the next several periods of rapid growth in
international commerce -- from A.D. 600 to 750, from 1000 to 1300
and from 1500 to 1800 -- China again tended to run very large trade
surpluses. By 1700 Europe was paying with silver for as much as four-
fifths of Europe's imports from China because China was interested
in little that Europe manufactured.

A longstanding mystery for economic historians lies in how so much
silver and gold flowed to China for centuries for the purchase of
Chinese goods yet caused little inflation in China. Many of China's
manufactured goods remained much cheaper than other countries'
manufactured goods until the early 1800's, despite the rapidly
growing supply of silver sloshing around the Chinese economy.

One theory is that Chinese output was expanding as fast as the
precious metals supply; another is that the Chinese were saving the
silver and gold instead of spending it.

The same phenomenon has appeared today, as dollars inundating China
have resulted in practically no increase in prices for most goods
and services (although real estate prices have jumped in most
cities).

China has an even easier time preventing domestic prices from rising
these days because modern banking techniques allow China's central
bank to buy up the dollars and take them out of everyday
circulation. The central bank has accumulated the country's immense
foreign currency reserves in the process.

The British Empire figured out in the 19th century how to maintain a
large long-term trade surplus with China. So far, however, nobody
has suggested that the United States try to fix its trade woes using
the British approach: getting millions of Chinese addicted to
imported opium.

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