THE ECONOMIC STRATEGY OF CHINA

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<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;line-height:200%”>Introduction</p>
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<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The opening up of China economy to the Global Markets has led to remarkable economic growth in China. It has resulted in the shift in the economy from an agrarian economy to an industrial superpower. The increase in productivity and wages then resulted in China becoming the largest economy in the World.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The opening up of the Chinese economy has led to a significant level of exports to the US, which has resulted in a numerous trade surplus. China through the central bank has utilized the US dollars in purchasing treasury securities. It is meant to ensure that its currency peg to the dollar is stable ensuring high competitiveness.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The offloading of US debt by China is expected to spell doom for the US economy. The funds to finance the fiscal deficit would be unavailable. It would lead to reduced economic growth, which would result in high level of unemployment, and costlier products as American goods would be expensive.</p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;text-indent:48.25pt;line-height:200%”>China&rsquo;s Economic Boom</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Growth in the Last Decade</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The rise in the economy of China witnessed in the past ten years has averaged over 10%. It has been because of the government efforts in taking up principles of a free market. It was a correction of the strict communist policies initiated under Mao. The policies had led to millions of death and economic derailment. Some opponents argue that China is underestimating its growth due to the strict privacy policy of the government in releasing financial data (Hu and Khan 1997, p. 1-8).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>Trade has supported the growth of the economy. In 2009, China overtook Germany as the biggest country regarding exports. The growth of local factories made China be the largest manufacturer of cars. It surpassed countries like the Japan and the US with a rich history of motoring. The growth in the economy made China be the largest market of Cars. It happened partly due to the huge population as well as the rise in the economy, which led to improved household incomes (Hirst, 2015).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>Some of the reforms to free the economy included opening up some sectors like financial services and infrastructure to private investors. The industrial growth is enabled by the country having lower labor rates when compared to the US. It makes the manufacturing affordable which then affords companies higher margins. The quick adoption of technology has enabled it to be a world leader in the electronics industry.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>An enormous amount of energy has been needed to support the Chinese industries. It has led China to be the largest emitter of carbon. It is evident in their smog-filled cities, which even prompt dwellers to walk with masks. The trend has been addressed by the country adopting renewable energy sources.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Role of Central Bank in Stimulating Economic Growth</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The Central Bank of China has supported the economic growth through the creation of policies that increase liquidity and stabilizing its financial system. Liquidity has been improved by imposing interest rates cuts. It has helped in making capital affordable and thus expanding credit availability (The People&#39;s Bank of China, 2017).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>Measures meant to improve liquidity has been an action expected to address the capital outflow from China. The balance has bene between lowering financing costs and capital flight from monetary easing. The benchmark interest rates were cut six times from 2014 while Rmb 2.5tn injected. The central bank has further enhanced the use of open market operations in managing monetary supply. Initially, it happened twice a week. The tools improved government flexibility in controlling the economy.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>Elimination of capped interest rates in 2013 led to deregulation of domestic interest rates. It led to market forces of demand and supply determine the ultimate cost of credit to consumers (Zhou 2015, p.19-32).</p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;text-indent:48.25pt;line-height:200%”>China&rsquo;s Currency and Trade Balance</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Why China is Buying US Treasury Securities</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The US debt to China has been over $1 trillion at the start of 2017. The growth in China economy has been export driven. It has led to a huge trade surplus with the US. The Chinese trade with the world in dollars yet they have to pay their local operating expenses in the renminbi. The huge receipts from selling in dollars are then stored in US treasuries. It is because the dollar is considered a stable currency and thus a haven for their investments. It is confirmed by the US having not defaulted on its debt (Garrett 2010, p.22-39).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The buying of treasury securities has served to weaken the Chinese currency thus allowing the US to borrow more cheaply. It has ensured that economic growth is sustained. Keeping the yuan, low while the economy strengthened made sure that the exports were competitive (Morrison 2011, p.409).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The US acted to allow the Chinese debt to balloon to allow its consumers enjoy lower prices when goods are manufactured from abroad. It further enables it to fund federal programs that allow its economy to grow. It ends up ensuring that its interest rate is low thus easing availability of credit (Morrison 2011, p.409).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The holding of US treasury serves China as a political bargain tool. It helps foster better working relationships as the disposal of the US securities would lead to an oversupply of dollars weakening the American economy. The debt then acts to keep the two largest economies in a working relationship (Garrett 2010, p.22-39).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Effects of Purchase of US Treasury Securities on Currency and Trade Balance</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The impact of the acquisition of the US debt has led to the yuan being low. Keeping the yuan low has been a target by the Chinese government due to the benefits accrued from making its products competitive.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The trade between the US and China makes the Chinese government receive dollars from companies doing exports. It then used the dollars to buy US treasuries that increase the overall demand for the dollar thus increasing its value (Morrison and Labonte 2011, p.507).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The trade deficit between US and China has widened over the years. It exists as the value of exports to the US far outweighs the imports. The deficit has been supported by China&rsquo;s ability to produce consumer goods at a lower cost. The reduced cost is enabled by a lower standard of living in China and the pegging of the yuan to the dollar. Efforts by the US to produce goods in America lead to high prices, which makes the items unaffordable (Milberg 2008, p.420-451).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The purchase of US treasuries enables China to keep US interest rates low. The low rates in the US translate to affordable credit, and thus they can make more purchases. The consumption ends up being the cheaper goods from China, which then leads to further widening of the trade deficit (Morrison and Labonte 2011, p.507).</p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;text-indent:48.25pt;line-height:200%”>China&rsquo;s US Debt Holdings</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Effects of Offloading US Debt Holdings</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The consequences of China offloading its US debt are varied. It would lead to the treasury rate rising thus leading to an increase in the cost of debt. The high cost of debt would result in a slower growth pace as items become more expensive.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The selling of debt would result in the strengthening of the Chinese yuan. A stronger Chinese yuan would imply costlier goods and services. The more expensive products would end up not being highly competitive than the goods produced in the US. It would then prompt local manufacturers to grow as the demand for their products increases (Corden 2009, p.103).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>China budget surplus would reduce further if the nation engaged in selling its US debt holdings. The state investment in China would increase and lead to boost in domestic demand of goods.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The expected adverse impact of China offloading the US debt has however been neutral. It has happened due to the uptake of the debt released by China by other nations. It is due to the US dollars being currency reserve of choice, which makes demand to be high. The high demand has been supported by the higher yields and lower risk when compared to negative yields in some European nations (Corden 2009, p.103).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”><i>Why would China be tempted to offload US debt?</i></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>China would be tempted to sell off its debt to restore stability. In case the yuan suffered a devaluation, the sold debt would help in shoring up the currency devaluation. The sale of debt would keep money from leaving their economy and thus reduce the depreciation of the yuan (Tyers 2016, p.1674-1702).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The selling of US debt would give China a higher bargaining power on economic issues. The debt to the US is critical in plugging the fiscal deficit, which aids the US in achieving economic growth. Threatening to sell off the debt would lead to the US softening its stance on financial matters (Tyers 2016, p.1674-1702).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The holding of massive debt was a source of pride for China; however, it came at a cost. Reducing the reserves to the needed levels would tempt the government to reduce its level of debt to manageable levels (Corden 2009, p.103).</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>Risk reduction is essential as an event of default would lead to great distress in the economy. As the massive debt levels are concentrated to the US, selling off would lead to diversification, as China would lend to other nations. It would enable China to have better relations with other countries and a superior return after having reduced the level of risk.</p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;line-height:200%”>Conclusion</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The US and China have been great trade partners by the degree of trade conducted. America can have affordable goods, as production is cheaper in China. On the other hand, China benefits from employment creation and forex reserves accumulated from the trade.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The holding of massive treasury securities was viewed of acting as bargaining power tool for the Chinese nation. It has been demystified by the sale of the securities by China as other countries have taken up the debt thus reducing the impact expected on the US benchmark rates.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The Central Bank of China has controlled the peg to the dollar and thus maintained its country products competitive when compared to the US. The falling exports by China prompt for the devaluation of the currency to shift the economy to domestic consumption. It would be essential to reduce the holding of US dollars as the yuan will be demanded more thus reducing the cost and risk of holding excessive debt.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>More research is required in determining the impact and reasons of China selling the US treasury holding. It is necessitated by the fact that the Chinese government has held their motives in private and data is limited as instances of selling have been few in the past..</p>

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