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Why China Is in a Position to Threaten the US Currency - Assignment Example

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The paper "Why China Is in a Position to Threaten the US Currency" states that any threat of withdrawal can trigger pressure on the demand for the dollar and an increase of exchange rate. It cannot be called as subsidizing because both countries are benefitted by the transactions…
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Why China Is in a Position to Threaten the US Currency
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Download file to see previous pages It is predicted by the IMF that it will overtake the US economy by 2016(Economy Watch, June 2, 2010) In November 2011, U.S. debt to China amounts to $1.13 trillion. This is 25% of the total $4.6 trillion of US debts. In 2011, China exported $1.58 trillion worth of production, 18% of which is exported to the US, while it has imported $333.9 billion from the US, creating a trade deficit of $295.5 billion. (Kimberly, Amadeo). This massive surplus is the effect of China’s monetary policy of keeping its Remnibi lower than the equilibrium rate. This monetary policy is the subject of debate of IMF, the World Bank, the government, and other financing bodies. However, despite its robust economy, its GDP per capita income has remained relatively low as compared to the United States. China’s GDP per capita is $4,428 while the US has $47,153.(The World Bank) In effect, China is not subsidizing the US economy because both countries benefit from the deal. The proceeds of the US debts are spent on federal programs while payments of interests of the loan are spent by China to propel its economic growth. US debts also kept interested rates low. It is threatening because by holding too much ownership of U.S debts, China can use it as an economic weapon and shift the economic balance in its favor. Being the second greatest in the world’s economy, China can use this power as leverage for imposing demands. For instance, in 2009, China proposed for a new global currency to replace the dollar because it was alarmed of the drop of dollar rate, and was afraid that its investments would deteriorate (Macdonald, Joe. 24, Mar. 2009). China has been reported to feel uneasy about relying on the dollar to store its reserves. It has also pressed for changes to give developing countries more influence on the IMF, the World Bank, and other financing institutions. ...Download file to see next pages Read More
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