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China Pressures Washington

In this entry, we will discuss the pressure China is putting on Washington regarding the stability of their investments in the U.S. economy. Below, we will take a closer look at the investments China has in the form of T-Bills, as well as the reasons why they have recently expressed concern.

China is the United States’ biggest investor. With about $1 trillion in U.S. Treasury bonds, along with other forms of investments, it is to be expected that China is inquiring about America’s financial situation. This past Friday, China’s premiere, Wen Jiabao, asked for a guarantee that China’s investments will be safe. “We have a huge amount of money in the United States. Of course we are concerned about the safety of our assets.”

So why exactly is China concerned? Well, it’s no secret that the recession in the U.S. economy is apparent to the rest of the world. With the increase in government spending, the U.S. continues to print more and more money. What could result is inflation, which would then cause the U.S. dollar to collapse in value. As the largest holder of America’s public debt, China needs to feel confident that its investments are safe.

President Obama responded to Jiabao’s concern with confidence, commenting: “And so I think that not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States.” Obama feels that the stability of the U.S. economy, along with its political system, has enabled China’s investments to continue, despite the financial crisis.

So what would happen if China pulled its investments, despite President Obama’s reassurance? Well, if China sold its treasury holdings, the value of the U.S. dollar would fall. As a result, borrowing costs in the U.S. would increase. China may be hurt in the end, as it would then be more difficult for Americans to buy Chinese goods.

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