China's Giant Pool Of Dollars

Mar 15, 2012
Originally published on March 15, 2012 11:08 am

China's central bank is sitting on a giant pool of U.S. dollars. It's the world's biggest holder of foreign reserves, worth over $3 trillion at last count.

All that money has piled up because every year, China exports more than it imports; it runs a trade surplus.

There are lots of reasons for China's trade surplus. In the past few decades, China has built an amazing manufacturing ecosystem. It's become the factory to the world.

But China's central bank has also given the country's exporters an extra boost.

It has kept China's currency artificially weak relative to the dollar, which makes China's exports cheaper in the rest of the world. It also makes imports more expensive in China.

So keeping the currency weak increases China's trade surplus on both sides of the ledger — it increases exports and decreases imports. And, year after year, China's pile of dollars keeps getting bigger.

This has become a problem for both China and the U.S.

It means U.S.-made goods are more expensive in China — which is why you often hear U.S. politicians talking about China manipulating its currency.

What's more, China's giant pool of dollars — much of it invested in U.S. Treasury bonds — makes China uncomfortably dependent on the health of the U.S. economy.

"Foreign exchange reserves have exceeded our country's rational demand," the head of the China's central bank said last year. This is an understated way of saying, enough already with the giant pool of dollars.

And, in fact, China has been letting its currency get stronger over the past few years. That has been pinching the nation's exporters.

"I'm making much less," Rosalia Yang, whose company sells imitation-wood flooring, told us recently, when we visited her factory outside Shanghai.

But the strengthening currency does have a flip side for people in China: It makes their imports cheaper. As a result, Rosalia Yang is looking to get into the import business.

"We would love to buy products from U.S.," she told us. "We have seen what is happening in China, so we believe the market needs to turn."

She's not sure what she'll import — maybe medical devices. In any case, she says, the U.S. brand is really strong in China; people associate Made in America with quality.

And as people in China get richer, they can afford to buy more American goods. now. If Rosalia is right — if the market does turn, and China's imports start to balance its exports — it could be a good outcome for everyone.

The U.S. would sell more stuff to China. Things would get cheaper for Chinese people. And dollars would stop piling up in China.

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When some tourists go to China, they want to see the Great Wall or Forbidden City. When our Planet Money team went to China recently, they were excited to see China's Central Bank. Over the past the decade, the People's Bank of China has amassed an unbelievably large pile of U.S. dollars. Jacob Goldstein and David Kestenbaum explain how the pile got there and why it's a problem for China and the United States.

DAVID KESTENBAUM, BYLINE: We requested an interview at the People's Bank of China, but we didn't get one. So we did the second best thing.

JACOB GOLDSTEIN, BYLINE: A distant second.

KESTENBAUM: One cold night we went and stood outside the building on the streets of Beijing.

GOLDSTEIN: That is a giant pool of money.

KESTENBAUM: There it is.

GOLDSTEIN: How big is the giant pool of money these days?

Let me read to you from a document I have in my hand: From the People's Bank of China, conveniently published in English, the dramatic title Financial Statistics, Q1 through Q3, 2011. China's foreign exchange reserves stood at U.S. $3.2017 trillion.


GOLDSTEIN: Trillion dollars, right here. We're here. We made it.

KESTENBAUM: How did China get this giant pool of dollars? By selling so much stuff to the rest of the world, stuff like this.


GOLDSTEIN: Artificial wood flooring.

KESTENBAUM: Feels very solid.

GOLDSTEIN: Yeah, we're at a factory now on the outskirts of Shanghai.

KESTENBAUM: In front of us is a machine that's making - seeming out of nowhere - what looks like a very long plank of wood.

GOLDSTEIN: Rosalia Yang works for a company called the Zaonee Group. She sells this fake wood to buyers in the U.S. and Canada. People use it to build backyard decks. And Rosalia says customers buy it for all kinds of reasons.

ROSALIA YANG: So first, it's anti-termite.

KESTENBAUM: Anti-termite.

YANG: Anti-termite.

KESTENBAUM: Termites don't like to eat plastic.

YANG: No. (unintelligible) no. So it's great for California. And it's fire resistant. (Foreign language spoken)

GOLDSTEIN: There's one other big reason this flooring sells so well: it's cheap. And China's central bank, that building we stood outside of in Beijing, it's working to keep it cheap.

KESTENBAUM: The central bank does this, by keeping China's currency artificially weak. The world's other major currencies they trade on the open market, they go up and down. But in China, the central bank just says this is the exchange rate.

GOLDSTEIN: Keeping the currency weak helps every exporter in China. It helps them so much that China sells way more stuff to the rest of the world than it buys. This buying and selling, it happens in dollars. China has more dollars coming in than going out so, year after year, those dollars have been piling up at the Central Bank.

KESTENBAUM: This situation, it's not great for China or the United States. From the U.S. perspective, China's weak currency makes our goods more expensive in China. When you hear U.S. politicians complain about how China manipulates its currency, this is what they're talking about.

GOLDSTEIN: But the situation isn't great for China either. That huge pile of U.S. dollars, it makes China very dependent - too dependent even - on the health of the U.S. economy.

KESTENBAUM: Which may be why, over the last couple years, China has started to let its currency get stronger. For Rosalia and her colleague Jacki Jong, in the short-term, this is hard. It makes Chinese exports more expensive.

YANG: So that's mean I'm making much less.


JACKI JONG: That's very bad. We lost much.


GOLDSTEIN: So what does that mean for your business?

JONG: Oh, pain. Painful.


GOLDSTEIN: But a stronger Chinese currency does mean American stuff is now cheaper in China. And here, Rosalia says the words that every American manufacturer and politician wants to hear.

YANG: Actually we will love to buy products from U.S. We have seen what is happening in China, so we believe the market need to turn.

KESTENBAUM: They're not sure what they'll import - maybe medical devices. But if Rosalia is right, if the market does turn, that pile of dollars in China, it would stop growing. One day those dollars, they might even start coming back home.

I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein, NPR News.

INSKEEP: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.