The Washington Post had a front page article telling readers that the "Weak Dollar Fuels China's Buying Spree Of U.S. Firms." The article then gave accounts of the various investments by Chinese individuals and corporations or its sovereign wealth fund. There is one problem with the Post's story: the dollar isn't weak against China's currency. While the dollar is down by more than 40 percent from its peaks against the euro and some other major currencies, China maintains a managed float of its currency against the dollar and has only allowed a modest increase over the last two years. While the fall in the dollar against other currencies may explain a decision by the Chinese to shift investment from third countries to the United States, it would not explain a sudden increase in foreign investment by the Chinese. The more obvious explanation is that the Chinese have accumulated massive amounts of foreign exchange as the result of their policy of keeping down the value of the yuan against the dollar. This policy requires that they hold onto the dollars that they earn as a result of their trade surplus. Until recently, the Chinese had put almost all of this money into U.S. government bonds. These were extremely bad investments since they paid low interest rates and the dollar plummeted in value against other major currencies. It is likely that the experience of consistently losing money on their dollar holdings has prompted the Chinese to buy assets that pay a higher return than government bonds. This is a more plausible explanation than the weak dollar.
--Dean Baker
