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A Confucian conundrum for China

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The Chinese own more United States Treasury bills than can be counted in a lifetime, and as the dollar printing press roars on, the rulers of the People’s Republic are getting nervous. They would like to see another reserve currency, and quite like the idea of it being the renminbi. After all, the euro and the yen are really too small to fulfill the role, while sterling is just small change.

So China has this week decided to issue its first sovereign bonds denominated in its own currency which foreigners can buy, at least in small amounts. After all, if the world is to hold renminbi reserves, it needs a proper market in its central bank IOUs.

So far, so logical. But there’s something odd here. Buyers of the bonds must first acquire the right currency, which in practice means selling dollars to buy the renminbi. The ultimate buyers of those dollars will be the Chinese, who will then buy yet more US T-bills, making the pile even higher.

International investors will welcome a few Chinese government bonds in a diversified portfolio, but while the vast trade imbalance between China and the US persists, issuing them will do nothing to ease the upward pressure on the renminbi, or to reduce that bill mountain.

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