First, China’s relentless purchases of U.S. treasuries have not put China in a position “to have influence over U.S. policy and diminish relative U.S. prestige and influence”. If anything the opposite is true, as the author correctly points out above.

Second, the primary goal of China’s ruling party (besides maintaining its grip on power) is maintaining social stability. China must grow rapidly to keep its massive population out of poverty. Export-led growth (with a disproportionately large amount of exports to going to the U.S.) and a stable yuan (i.e. linked to the value of the dollar so that Chinese exports never get too expensive for U.S. consumers) have helped China achieve this goal. But they have also increased China’s dependence on the U.S., both as a consumer of China-made goods and a supplier of U.S. dollar-denominated bonds. Not to mention U.S. FDI in China, another needed source of job-creation and technology transfer.

Dollar purchases by China recycle dollars and keep the conveyor belt moving and also prop up the dollar vis-a-vis the yuan. It’s not about prestige, although it is true that the Chinese govmt would willingly endure some degree of loss in order to save or gain face.

After watching FSC hearing yesterday I’m reminded of something which confuses me and has not (or I haven’t found) been adequately explained.

Around Oct last year, we read there was +/- $70t in toxic assets (mostly mortgage CDSs as I understand it) floating around the globe. Given most of it was off the books or unregulated, as I understand that was a best guesstimate.

By mid-December, I read that total was down to around +/- $40t. Ok, I never got clear about what happened to that $30t reduction.

Now a couple weeks ago one of Roubini’s RGE newsletters said it was (from memory) around $4.5t. Then Geithner testified yesterday it was significantly less than that, although he didn’t pinpoint a #.

So my questions:
a) how many $’s of toxic assets are out there?
b) how did we get from $70t to $4.5?

Thanks.

Once you (China) start issuing $1 trillion-$2 trillion . . .we (US) know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do….

What a muddle. They are aiming at conflicting goals. A lot of things would clear up if they started buying US goods and services.

There is a naive alternative explanation about what China is up to that makes a lot more sense to me. It says that the govt. of China has enough money to spend for most of what it wants both now and in the future (note that is very different than having enough money for the standard of living that the Chinese people want, which would give them more time to agitate and demand different govt.), but what it craves more than a high rate of return after inflation is international power and prestige. This naive theory says that the PRC positions themselves to to have influence over U.S. policy and diminish relative U.S. prestige and influence where possible because that in itself is the end they are seeking, and worrying about dollar devaluation is mainly just a prop in that game.