By Jonathan Yates
About 40% of China’s gross domestic product comes from exports to the United States and Europe. Keeping those exports going is one of the reasons why the Chinese buy so much American and European debt.
Europe and the U.S. are generating voluminous amounts of debt. If their economies are to grow, that debt has to be bought at low interest rates. China has been happy to oblige. Two-thirds of its $3 trillion in foreign reserves are in European (NYSEARCA:FXE) and US financial instruments (NASDAQ:DLBL).
At the same time, China needs to manage the value of the yuan (NYSEARCA:CYB). They have an interest in keeping the yuan strong, but not too strong. The Euro has plunged in value due to the debt crisis, while U.S. policies are driving the dollar down. When China buys American and European bonds, it pushes up the value of dollars and euros due to Beijing’s bullish position on the debt.
Purchasing bonds from European and the United States accomplishes critical goals for Beijing. In purchasing the debt, China assures that interest rates remain low so that businesses can expand and consumers can buy goods. That turns into greater export sales — and profits — for the People’s Republic of China.