They are investing in us because they are co-dependent. I think Germany, like China, has more exports than imports. Why would they stop selling to their biggest customer? The only one creating a problem by selling to us, as far as I know, is China. They are making their dependency worse, because they have pegged the renminbi (the name for the currency; yuan is the name of the coins and bills themselves) to the dollar.
It goes like this. China Toys gets $25mil for selling us games and stuffed animals, and takes it to the bank in China to get yuan. The bank does not want to exchange the dollars into yuan, because that would make their currency appreciate. So they print the $25 mil worth of yen, and give that to China Toys. Then the $25 mil they got from China Toys is invested in MBS, Treasury bills, etc. So the more they export, the more their economy overheats, because they are printing so much money. This is why economists say the only way that China can slow its quick growth is by letting its currency float.
What China really needs to do, is turn its citizens into consumers.
Some Chinese economists and politicians have made statements about diversifying out of dollars, and buying euros and gold.
I also wonder about their thinking, and why they would continue buying more and more Treasuries. Now they have so many Treasuries, although Japan has twice as much as China, that selling them would lower the dollar’s value enough to hurt China’s holdings. So they would need to sell them gradually. How long will they keep funding our deficit?
Roubini and Brad Setser (RGE Economics) write almost daily in their blogs about China. Roubini expects China to make a sudden 5% change in the yen. Sudden, so the markets can’t exploit an expected appreciation with currency trading. He also explains why the rest of the world will “catch a cold when the US sneezes”, i.e. a global recession is in the pipeline.
