Kyle Bradisher reports in yesterdays New York Times that China has such a huge stash of other countries’ money that it could, in theory, give bonuses equaling half a year’s wages to all 770 million of its famously low-paid workers.
China will soon release statistics showing that it has passed Japan as the biggest holder of foreign currency the world has ever seen. Its reserves already exceed $800 billion and are on track to reach $1 trillion by the end of the year, up from just under $4 billion in 1989. But China has held a similar position before.
The current pile, much of it invested in U.S. Treasury securities or mortgages on American homes, is a result of China’s selling more goods than it buys and of foreign money pouring in for the building of factories, apartment towers, office buildings and shopping malls.
China is not alone; oil exporters are also piling up cash and trying to figure out what to do with it, leading to disputes like the current one over the Dubai company DP World’s designation to run cargo terminals at U.S. ports.
History offers parallels to the yawning U.S. trade deficit and the resulting accumulation of dollars in China. China sells to American companies almost six times as much as it buys from them, but this is not the first time China has been an export powerhouse. Ancient Rome, for example, found that it had little except glass that China wanted to buy. Nearly 2,000 years ago, Pliny complained about the eastward flow of Roman gold along the Silk Road in exchange for Chinese silk.
Long-distance trade collapsed during the early years of the Dark Ages. But through the next several periods of rapid growth in international commerce – from 600 to 750, from 1000 to 1300 and from 1500 to 1800 – China again tended to run very large trade surpluses. By 1700, Europe was paying with silver for as much as four-fifths of its imports from China because China was interested in little that Europe manufactured.
A longstanding mystery for economic historians lies in how so much silver and gold flowed to China for centuries for the purchase of Chinese goods yet caused little inflation in China. Many of China’s manufactured goods remained much cheaper than those from other countries until the early 1800s, despite the rapidly growing supply of silver in the Chinese economy. One theory is that Chinese output was expanding as fast as the supply of precious metal. Another is that the Chinese were saving the silver and gold, not spending it.
The same phenomenon has appeared today, as dollars inundating China have resulted in practically no increase in prices for most goods and services – although real estate prices have jumped in most cities. China has an even easier time preventing domestic prices from rising now because modern banking techniques let its central bank buy up the dollars and take them out of everyday circulation. The central bank has accumulated the country’s immense foreign-currency reserves in the process.
The British Empire in the 19th century worked out a way to maintain a large long-term trade surplus with China. So far, however, nobody has suggested that the United States also try getting millions of Chinese people addicted to imported opium.
What would Confucious say? Probably too busy counting.