U.S. Politicians have been side-tracked by the war in Iraq for quite a while, and all the while a "ruthlessly merchantilist China is running a flanking maneuver so effective it now threatens America's economic, financial and political independence," states Peter Navaro, of the Christian Science Monitor.
Chinese capital floods in on a daily basis, to purchase U.S. government bonds - and is therefore funding the U.S. budget and trade deficits. Why are they doing this? To keep our currency undervalued. "China simply recycles surplus U.S. currency back into the U.S. bond market. Furthermore, China now has become the largest monthly net buyer of U.S. securities. Over two-thirds of China's undiversified $1 trillion in foreign currency reserves are estimated to be in U.S. bonds, and will "very shortly eclipse Japan as America's largest creditor." In just a few more years, its foreign currency is projected to increase by 50%.
It started out for China to sell exports cheaply, and keep imports dear, but has steadily turned into a means to control U.S. response to China's unfair trade practices: illegal export subsidies, currency manipulation, piracy and lax environmental, health and safety standards. U.S. politicians have tried to stop these practices, but they seem to have their hands tied behind their backs, because China is now able to threaten to stop financing U.S. deficits. They are now able to start dumping our currency, if they so wish.
It can actually happen, and if it does then the cost of imports interests and mortgage rates will increase dramatically. The result will be overburdened consumers. Would this action hurt China as much as America? Beijing's view is that the Chinese are tougher and better able to handle economic devastation than Americans. They claim that Americans have grown spoiled from the goodlife, and thus unfit to handle such devastation to the economy. They would call their own citizens tougher. Their own citizens have no choice in the matter, because they are controlled by a communist government.
In 5 years, China's foreign reserves are anticipated to rise to $2 trillion. This will allow China's currency to appreciate, and they can then go on shopping sprees for U.S. companies. Some say that this isn't a big deal, because countires such as Germany, Japan and France have done this. So why would China be any different? It is because China's shopping sprees will be largely financed and operated by their government, not corporations. "This is tragic from a policy-making view, not from a profit-making perspective", suggests Navaro. We could end up with quick-speeds in the transfer of sensitive technology, and outsourcing and offshoring of U.S. jobs.
There is still hope, however. We still have time. Congress has to pass a comprehensive bill. The U.S. trade representative and commerce secretary will have to have "freer reign to seek relief from." Let's cross our fingers, and more importantly - pray.