Getting pushed around by China?

China has more than $1 trillion invested in U.S. Treasury bonds. How will that alter the balance of power?

China is flexing its economic muscle, said the Hong Kong South China Morning Post in an editorial. Chinese Premier Wen Jiabao last week said he was “a little bit worried” about the safety of the more than $1 trillion China has invested in U.S. Treasury bonds. The “unexpected” comment was widely seen as a signal that Beijing plans to use its newfound influence over Washington to force concessions on trade. Wen also said that China would not increase its contributions to the rapidly depleting International Monetary Fund unless the IMF gave China a greater decision-making role. Taken together, China’s new positions “amount to a bid to increase its bargaining power” in global financial matters.

There may be less to China’s muscle-flexing than it appears, said Marcus Gee in Canada’s Globe and Mail. In reality, China can’t really use its economic leverage against the U.S. If Beijing were to “turn around and start selling dollars”—a threat implicit in Wen’s comment—the value of the dollar would sink against the Chinese yuan. That would have the effect of making Chinese exports much more expensive, and China would suffer. And even if China wanted to diversify and invest more in countries other than the U.S., that’s not much of an option. Investments everywhere are losing value, and U.S. government bonds are still the safest place to invest. “So much for the idea that China has the whip hand over the United States.”

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