HeF

Can China Take Up Consumption Slack From the U.S.?

Chinayouren, that's part of the answer. China cannot use foreign currency reserves for domestic investment without pushing the RMB through the roof and effectively killing off the export industry. But there is also the fact that reserves aren't unencumbered wealth. They are simply assets against which there are liabiltiies, in the same way that Citibank has a trillion dollars of assets but is not worth a trillion dollars (it also has nearly that much debt).

In other words the PBoC had to borrow RMB to buy the reserves, and some people think the rise in the value of RMB liabilities may have already wiped out the PBoC's capital cushion. Giving the government reserves as a 'gift' is no different than having the MoF borrow the money domestically, with the difference being that it would result in a rise in PBoC domestic liabilities rather than MoF domestic liabilities.