An interesting discussion on China and it's internal troubles. I've often vascilated between worrying about China economically, and not (but I still worry about them as a future military threat, unless they move completely away from communism). This piece has some interesting points to make.
I'll quote a few:
China is loudly whispering that they may start selling off some of their holdings of US Treasury debt. The last I heard, they have about $1.3 trillion in dollar-denominated instruments, up from about $1 trillion last fall. About $400 billion of this is in long-dated debt like notes and bonds.
...
Now the real problem here is that China's threats are empty. Forget about the threats to the stability of the US economy. The last time the Chinese talked about diversifying out of US Treasuries, Fed Chairman Ben Bernanke went on record saying that he would simply sterilize and/or monetize any large Chinese sales of US debt. Don't underestimate his willingness to follow through on this, and don't underrate the Fed's ability to keep the resulting inflation under control without significantly disrupting the US economy.
But even more to the point is that there just aren't any asset classes in the world, apart from US Treasuries, that are liquid enough to soak up $400 billion or more should China go shopping for them. Again, the Chinese threat is empty.
His conclusion:
The true challenge for us is to find a way to exploit the weakness in China's position. China cares about nothing more than their prestige and standing in the world community. Not only is this deeply ingrained in the Chinese character, but it's also one of the keys to the current government's tenuous hold on legitimacy. They'll probably be willing to trade away a good deal in order to avoid being seen as having messed up their transition to a globally-dominant market economy.
The proper focus for our China foreign policy is to find a way to keep China permanently dependent on us for increases in prosperity, while forcing them to give American investors a considerably larger stake in what is the biggest growth-engine in the world. If I can figure out how best to do that, I'll let you know.
I'd read the whole thing if I were you.
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