China's One Trillion in Cash Reserves

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China's cash equals opportunity Its unprecedented store of foreign currency could help cement ties with the United States. By Xiao-huang Yin China has announced that its foreign-currency reserve will reach one trillion U.S. dollars this month, creating an extraordinary "miracle" in modern economic history: No country in the world has ever possessed so much ready money. While this is good news for Chinese leaders, the money also presents them with a new dilemma in relations with the United States. China's trillion-dollar cash reserve will inevitably raise new concerns in Washington and complicate election politics. To Beijing's critics, China's currency is vastly undervalued, giving its exports an unfair advantage - China's enormous trade surplus with the United States, $211.6 billion in 2005, has contributed to its rapid growth of wealth. The administration will face additional pressure to take more forceful action and press Beijing to further revalue its currency, open its finance market, and buy more American products. Unfortunately, Beijing's cash reserve does not give it corresponding leverage to deal with the vexing U.S.-China trade tensions. China has opened its banking sector substantially to foreign investors, creating a sharp contrast to those of Japan and other Asian nations. For example, multinational Western financial giants, including CitiBank and Bank of Scotland, now own 25 percent of the shares of China's leading state banks. Because its banks are troubled by massive debts, Beijing can hardly afford to open its finance market wider. Neither would moving faster to revalue its currency help. China's currency, the yuan, has been rising quickly since it was linked to the U.S. currency last July and is now trading at an unprecedentedly high level against the dollar. Chinese economists fear that any quickening movement toward a more flexible currency would savage China's export industry and destabilize its economy. Buying more American products would appear to provide a solution to Beijing's dilemma. Strategic concerns, however, have led Washington to largely undercut this option by imposing stringent limits on Chinese purchases of equipment with advanced technology. The result is that China has the money, but few options to spend it in the American market. There is no quick-fix solution, but the money does give Beijing an opportunity to demonstrate that China is indeed a stakeholder in an America-led global economy and that its progress causes its interests to further align with those of the United States. China could use its huge cash reserve to double its ownership of U.S. treasury securities, which now stands around $280 billion. While this may not be the best investment strategy for China, it provides a critical cushion for Washington to keep inflation down, soothing fears that China as a global economic power could compromise America's interests. As China's hard-currency reserve derives, in part, from the savings of its fast-growing entrepreneur class, Beijing can further relax its restrictions on hard currency control at home, encouraging individual Chinese to purchase U.S. treasury bills. Although they represent only a sliver of the nation's 1.3 billion population, China's new rich, estimated in the millions, are in a frenzy about investing opportunities abroad. The convenience of the Internet should make it easy for these affluent entrepreneurs to invest directly across the Pacific. Beijing can also further collaborate with Washington in policy arenas in which they share vital interests. Finding alternative and sustainable energy to replace oil is such a crucial area. China's thirst for oil has led it to a frantic search for the scarce resources throughout the world, from neighboring Russia to faraway Africa, making the United States feel threatened. China's development also dramatically accelerates the onset of global warming, causing additional friction in China's relations with the West, its largest export market. Reducing dependency on oil thus can help Beijing and Washington resolve a major bilateral dispute. It can also free the world's two largest economies from the threat of anyone who wants to use oil as a diplomatic weapon against them. Mutual dependence reduces the likelihood of conflict. As the prosperity of the two nations is closely tied, China's trillion-dollar new wealth should grant Beijing and Washington more opportunities to transform the often-delicate bilateral relationship into a win-win situation rather than become a source of another round of dispute.