China's Effect on Dollar Reflects Growing Influence The economies of the United States and China are intertwined in ways that were unimaginable a decade ago. China has more than $1 trillion in U.S. reserves. Currency markets were rattled when a minor Chinese official said it was time to move some of that money into euros. Neither China nor the U.S. would benefit if the dollar plummeted rapidly.
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China's Effect on Dollar Reflects Growing Influence

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China's Effect on Dollar Reflects Growing Influence

China's Effect on Dollar Reflects Growing Influence

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As you're hearing the global economy is becoming more and more intertwined. Our reporter Jim Zarroli mentioned that yesterday. A Chinese lawmaker helped send the U.S. dollar falling due to comments he made. That Chinese lawmaker said his country would diversify its currency investments away from the U.S. dollar. Even though the official, in fact, has no say over Chinese monetary policy, the dollar plummeted to a record low against the Euro.

NPR's Frank Langfitt reports, that's an indicator of China's growing influence.

FRANK LANGFITT: The official was vice chairman of China's parliament, not an especially powerful position. But yesterday, his words helped move the markets. Back in the 1990s, if a Chinese official had talked this way…

Dr. THOMAS RAWSKI (Economy and History, University of Pittsburgh): Probably such comments wouldn't have been noticed in the international financial press.

LANGFITT: That's Thomas Rawski. He's a specialist on the Chinese economy at the University of Pittsburgh. And he says the reason is simple - China has far more U.S. dollar reserves today than it did 10 years ago, and therefore, a lot more influence. The country has about $1.5 trillion worth of foreign currency.

Nick Lardy is a China specialist with the Petersen Institute for International Economics. He tries to put that figure in perspective.

Dr. NICK LARDY Senior Fellow, Petersen Institute for International Economics): Their foreign exchange reserves of about 1.5 trillion are bigger than the GDP of all but a handful of countries in the world.

LANGFITT: If China were to dump dollars, it would hurt the U.S. currency. But China is now so linked to the American and global economies, Lardy says, it would pay a price for doing so. After all, China depends on American consumers to buy its exports.

Dr. LARDY: Well, it has a very strong interest in high economic growth in the United States because that's what generates our demand for imported goods, which is what generates the demand for China's exports. I think they're also interested in a relatively stable international financial system.

LANGFITT: It wasn't always that way. When Lardy visited China in 1978, it was essentially a closed, communist state.

Dr. LARDY: They were almost completely isolated from the global economy. Their trade was miniscule. They did not borrow any money abroad. China, not only didn't have any economic interaction with the rest of the world, during the Cultural Revolution, they withdrew all their ambassadors from every country except Egypt.

LANGFITT: Today, he says…

Dr. LARDY: It couldn't be a more profound transformation. China is, for the last couple of years, they've been the third-largest trading economy on the globe. They have the world's largest foreign exchange reserves. They're participating in all of the international financial institutions, which they were absent from.

LANGFITT: And that integration has benefits for the United States. Cheap Chinese exports have helped keep inflation low. And China's purchase of treasury bonds has helped finance American debt. For all of China's growing influence, some analysts say people overestimate its actual power.

Albert Keidel is an economist with the Carnegie Endowment for International Peace. He says China is still a relatively minor player in a market where $1 trillion worth of currency trades hands each day.

Dr. ALBERT KEIDEL (Economist, Carnegie Endowment for International Peace): What they forget is that the American monetary authorities, in particular the Federal Reserve System, has at its control vastly larger resources than the Chinese do.

LANGFITT: But if China's economy keeps growing by leaps and bounds, its influence is certain to grow as well.

Frank Langfitt, NPR News.

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