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China's Foreign Currency Reserves

The Chinese are coming, the Chinese are coming

I looked at the national debt clock (http://www.usdebtclock.org/ )yesterday and it indicated our national debt was $14,116,981,057,591.34. That's $14.1 trillion for those of you whose math knowledge stops at the thousands. This represents 96.4 percent of GDP. For all intents and purposes, we owe as much as we produce. On a per capita basis, the national debt is $44,900 per person. I don't know about you but I would like to have an extra $44,900 in my pocket. This is scary stuff.

On February 1 it was reported that China's foreign currency reserves total 7.95 trillion yuan, or $1.2 trillion. That's about 8 percent of our national debt. So, China owes 8 percent of the US and it grows larger every day. My question is should we be concerned or alarmed by these numbers?

Of course we are all concerned and many of us are alarmed by the size of the national debt. With two wars in progress, a stubbornly high unemployment rate, and, apparently, little innovation occurring in our key industries including technology (putting aside the iPad and other neat devices), it seems as though our greatest hope to remain the world's technology innovator is biotechnology where advances continue. Perhaps green technology will develop to that point but, quite frankly, other countries are ahead of us in this field and we will need to first play catch-up.

An important question is should we be concerned by China's rapidly increasing economic power and influence in the world? China is now starting to buy parts of U.S. banks and financial institutions. It was recently announced that Industrial and Commercial Bank of China Ltd has agreed to buy 80 percent of the Bank of East Asia's small, almost profitless, retail-branch network in New York and California for $140million. China 
This is significant because if the acquisition is approved it would be the first time a Chinese mainland bank would have activities operating under U.S. regulatory framework. One potential advantage is that it may open China's relatively closed financial disclosure system to wider scrutiny and increased transparency. It also might open the door to increased Chinese activity because U.S. regulators would have implicitly endorsed the soundness of China's government-controlled and politically directed banking system.

China Investment Corporation, the government's $300 billion sovereign investment fund, bought more than $9 billion worth of shares last year of the biggest American corporations, including Morgan Stanley, Bank of America and Citigroup. It also owns stock in some of the best-known American brands, including Apple, Coca-Cola, Johnson & Johnson, Motorola and Visa. Moreover, China is spreading its wings to other areas of the world including the push by its financial institutions into Europe, opening bank branches, searching for deal opportunities and even attending German banking classes. China Development Bank, a giant government-owned lender, is one of the four final parties eyeing a big stake in troubled German bank West LB AG. Another bank, Industrial and Commercial Bank of China Ltd., this month is opening branches in Paris, Brussels, Amsterdam, Milan and Madrid. There can be no doubt about China's economic clout in the world. The question is should we fear it?

Perhaps the best answer to this question is: Do we have a choice? We have dug ourselves into a hole and will need nothing less than a high-torque hydraulic digger to get out of it. Personally, I'm not concerned about the fact that China may be in the process of owning enough assets in the U.S. to exercise significant control over our policies. They can't do much worse than Congress has for the past twenty-plus years. In all seriousness, we should work with the Chinese and not against them in helping us to dig out of our mess. We need them to not only continue to buy our debt to finance our habits but not call in outstanding debt. Let's face it, most of us don't care that a product is made in China so long as it is safe to use. The key issue for the U.S. government is how will it reverse the course we have been on for the past twenty years where fraudulent business practices, a rapidly declining educational system, a vanishing work ethic, and the paucity of true leaders and statesman together have shoved our collective heads further into the sand as we continue to ignore the reality that we may not be the world's strongest economic power by the end of the next twenty years.