What China is Doing

There has been great debate on the purchase of U.S. Treasuries by Asian central banks over the past year. Brad Setser claims: "in 2003, the world added roughly $60 billion in euro and yen reserves, and $440 billion in dollar reserves. Since China accounted for about a quarter of the overall increase in the world's reserve, it seems likely that its reserve acquisition did not deviate too much from the global breakdown of roughly 90% dollars/ 10% other currencies." China poses a problem for a lot of Economists, as "The Economist this week estimated that 80% of China’s $515 billion in reserves are in dollars, which works out to $412 billion. China’s recorded holdings of Treasuries are around $175 billion. That leaves around $240 billion in other dollar assets." Brad Setser asks the question, "So what is China doing with the remaining $210 billion of reserves assets that it has added over the past two years?"

This Author's answer differs from that of most Economists. The answer can be found in the signing of a Trade treaty with Southeast Asian nations (10) for the purpose of eliminating all Tariffs by 2010. Every indication coming from the meeting in Vientenne expresses Chinese desire to create a South Asian form of the EU. This Author holds the view that China fully intends to fund the new SAU with American Dollar reserves held. These Dollars in Reserve, whether Treasuries or Dollars, will pay the Costs to individual nations of elimination of Tariffs, serve as a Development Fund for integration of Economies, and cancel need for Trade credits with the World by member nations. lgl