The NYT is struggling with facts that are very simple to explain. China knows it will take a beating on its dollar holdings -- its leaders are not stupider than everyone else in the world. They saw the plunge in the dollar over the years from 2002 to 2008, yet they continued to buy dollars. They know it will fall again in the future. The reason they buy dollars is sustain the market for their exports in the United States. Buying dollars keeps down the value of their currency against the dollar, which makes Chinese imports cheap for people in the United States. This is a key part of China's economic strategy of growing through exports. The United States absolutely does not need China to buy dollars to support its trade deficit. If China stopped buying dollars then the dollar would fall and the trade deficit will fall with it. There is no co-dependence as this article suggests. China's dollar purchases create the trade deficit. The article also completely misinterprets China's decision to shift from long-term debt to short-term debt. The article asserts that this decision was made because China worries that the dollar may fall and it may have to get out of dollar assets quickly. Actually the market for long-term treasury debt is quite liquid. If China wanted to sell 10-year or even 30-year treasury bonds and get out of dollars, it could do it in seconds, any day of the week. The reason for shifting from long-term to shorter term debt is the concern that interest rates will rise, leading to capital losses. China is willing to lose money by holding dollars even as it dollars fall relative to other currencies, but it has no reason to lose more money by holding long-term debt when it can instead hold shorter-term debt.
--Dean Baker
