US Securities and China
US Securities and China
US Securities and China
The rising of United States securities owned by China has been an issue in recent years. China mainly holds two types of U.S. securities, short-term and long-term. A short-term security is a bond that is typically thirteen months. A long-term security is a bond is to finance current expenditures and is typically about twelve years until the bond is fully matured. Both the long and short-term bonds are low risk and the government guarantees them.
In the fourth quarter of 2002 China held 9.6% of total foreign earnings, this amounts to about $118 billion of US securities. This amount skyrocketed to $895 billion by the end of 2009, which is about 24.2% of total foreign earnings. Although in this past year, it dropped slightly to $868 billion which is 21.9% of total foreign earnings.
China has been undervaluing their currency, the yuan, especially against to the U.S. dollar. The manipulation of China's currency helps control importation and exportation between the Chinese and the United States. Taking into account the manipulation of currency that the Chinese are partaking in, it allows them to control the amount of importation and exportation with the United States.
The Chinese are controlling the yuan to always be valued lower than the US dollar; because of this, America will always feel it is profitable to import products from China. This is because of the low labor cost in China along with the fact that the US dollar is higher than the Chinese yuan; it would be a better financial decision for the American government to purchase more products from China and sell the products in the United States. China does not export as many products from the United States because the US dollar is higher in value than the Chinese yuan.
This is beneficial for China because they are able to create jobs, products, and allow their market to thrive. This is made possible because the US dollar has more purchasing power in comparison to the yuan. If the yuan was allowed to fluctuate in accordance with the market instead of being manipulated by the Chinese government, than the yuan would most likely have been valued higher than the US dollar; considering this, American companies would be more inclined to produce products in the United States instead of importing them from China and this would have created more jobs in the United States.
The fluctuation of currencies is to steady the economies of each county. This would balance out the importation and exportation of the different nations. Since the Chinese are controlling their currency from the natural fluctuation process, the Chinese are able to have more exportation than importation. This causes the United States to accumulate more debt because they are forced to import products from China. Considering the control of the Chinese currency, the exportation of the United States has decreased and the profit from exportations has gone down as well.
The Chinese have been buying a lot of US bonds which is a doubled edge sword for the American economy. The more the Chinese buy American bonds, the lower the interest rate on long term bonds are. This was one of the reasons for the recent stimulation of the housing boom. On the other hand the if China decides to drop the securities it would significantly lower the value of the US dollar. Also, it would cause a higher inflation in the US and it would effect the Chinese asset reserve. The Chinese have been slowly moving away from the US dollar and into other currencies like the euro. Recently the congress has passed a new bill that would let the United States tax imported products from countries that undervalue their currency to help stimulate the american economy. This new bill passed is aimed more toward China more than any other country.
Which brings us to a big dilemma, if the US taxes most of imported Chinese products, would the Chinese retaliate by taxing American products being imported into China? Would China risk dropping the US securities into the market to damage the American dollar value and in turn damage their own asset reserve? If the United States only taxes a limited amount of goods, that are imported from China, that will help stimulate the economy along with creating jobs for the American workforce. It might be enough to not have the Chinese government retaliate and try to harm our economy even more.
Morrison, W. M. Congressional Research Service, Prepared for Members and Committees of Congress. (2010). China-u.s. trade issues Retrieved from http://www.fas.org/sgp/crs/row/RL33536.pdf
Palmer, D. (2010). House panel cranks up pressure on china currency. Reuters, Retrieved from http://www.reuters.com/article/idUSTRE68L5K120100924
Schifferes, S. (2006). China's trillion dollar surplus. BBC News, Retrieved from http://news.bbc.co.uk/2/hi/business/6106280.stm
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