The Weekly Standard: Of Debt and Detriment

Macroeconomic theory predicts that indebted countries have negative net foreign investment income, while creditor countries have positive flows. The US and China, however, are bucking the trend due to the idiosyncratic natures of both their currencies and governments. One element is China’s willingness, and the world writ large, to accept low returns on the dollar in exchange for stability. About one-fifth of all of China’s foreign assets are held as low-yield US Treasury securities. Still, “China's negative net foreign investment income also reflects the fact that it is lending to the rest of the world at risibly low rates,” report Benn Steil and Emma Smith for the Weekly Standard. Beijing’s goals are twofold: to subsidize Chinese corporations competing worldwide and to further its geopolitical aims in the Global South. Although US President Donald Trump has accused China of keeping its currency artificially low, the nation has actually relied on capital controls and emergency loans to limit the outflows’ depreciatory effect on the yuan. The writers also warn that China's reserves could fall dangerously low before the end of 2017. – YaleGlobal

The Weekly Standard: Of Debt and Detriment

Despite role as world’s largest creditor, China loses money on its loans in the name of stability, competition and geopolitics
Benn Steil and Emma Smith
Tuesday, February 21, 2017
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