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But no such place exists. Only the U.S. economy -- itself $13 trillion -- can bank this much money. Europe could take a few hundred billion, but it is yet to operate with a single voice and build financial institutions matching those in the United States.
Besides, European financial institutions operate in a manner similar to the Americans; hence there is no advantage in shifting the cash. Moreover, moving this much money would cause turmoil in U.S. financial markets, which in turn would incur the wrath of the U.S. government. This could be called an act of war. The United States could refuse to let China take away its money, and war clouds would gather momentum.
The above scenario is akin to a run on a large bank in the West during financial troubles. Too much withdrawal forces bank failure. Not only that, too much money deposited into another country may force turmoil in its banking sector, especially if it is not set up to handle that much cash.
The question now arises: How did China manage to collect this much money in the first place? This is triple the $300 billion in reserves needed by a country the size of China. Then again, could they ever repatriate this much money back home from the U.S. banks? If they did, what would they do with it? This is a difficult question with no easy answer. It is not likely that China wants to take that much money home.
It appears that the Chinese have been snared in a trap. It began when the much vaunted leader of China, Deng Xiaoping, rose to power. He wished prosperity for China. Concurrently, the West was looking for a cheap place to relocate its smokestack and labor intensive industry. China appeared to be the right place. Also, helping China would help the West to encircle the Soviet Union. The final understanding was that the United States would invest in China to build new factories and infrastructure. In return, the Chinese would have to guarantee some security for the U.S. investment -- export surplus was to be deposited in U.S. banks.
On paper this was a nice arrangement; it appeared to favor the Chinese. They got free money, jobs and brand-new factories. In their zeal to be the great manufacturing base for the world, the Chinese kept on asking for bigger and bigger amounts of foreign direct investment. This resulted in a huge increase in exports, with very few imports, especially from the United States. A trade deficit ensued, which the United States did not mind because in return the Chinese left behind their entire export surplus. Today the amount of FDI invested in China and China's foreign reserves are just about equal.
In the good old days of the Silk Road era, traders swapped Chinese products for products from other countries and trade stayed pretty much balanced. All deficits were settled then and there with additional goods. Failing that, gold changed hands. This arrangement, pure and simple, lasted 1500 years.
Today it is different. The Chinese can sell all they want to the United States and buy next to nothing from it. Although it is unbalanced, the United States is not complaining much. They have the Chinese money, which is financing part of the U.S. domestic and foreign agenda.
In a bit different scenario, if the Chinese bought as much as they sold to the United States, the United States would still be happy because U.S. businesses would create domestic jobs, make profits and pay taxes. A much greater prosperity would result. Somehow the issue of local prosperity and balanced trade has been lost. All the Americans see is a horde of somebody else's cash. They are eager to keep it within reach.
In fact, the U.S. "I owe you," given in return for Chinese cash, is not worth the paper it is written on. It is not unusual for nations to renege on promises. A case in point is the Shah of Iran's cash when he was overthrown in 1979. The United States froze all Iranian accounts, and it was many years before the Iranians were able to withdraw their money. The Chinese suffered the same situation during the Korean War.
Let us examine a scenario in which China takes all its horde of cash back home. What would they do with it? No economy in the developing or developed world could withstand this huge influx of cash. Inflation would be rampant, paper money would become worthless, exports would suffer and the overall social, economic and political structure of the country would collapse. This would be the worst mistake ever made.
What a dilemma! China can neither bring this much cash home nor take it elsewhere in the world. It has to be left in the United States.
So, what is the right scenario? The best solution would be for China to walk away from its export-oriented economy and balance its export-import books. It would have to put a hold on grabbing additional business abroad. Its export-only economy would have to switch to a center of consumption. That option would slowly dilute the U.S. cash holdings.
It has taken China 20 years to build this cash horde. It will take another 20 years to dilute it. This will soften the blow to the U.S. economy as more and more American goods show up in Chinese markets and fewer Chinese goods reach U.S. markets.
Today when a U.S. consumer goes to a bank, he gets a cheap interest rate on mortgages and personal loans, as little as 1.5 percent. Businesses are getting cheap loans to finance their activities. The U.S. government has been running a huge budget deficit for the last 30 years. Prior to the arrival of China's money, there was a huge hue and cry over the expanding deficit. But nobody is talking about it anymore. Everyone is aware that the Chinese are financing the deficit very cheaply. Even the Iraq war has a component of Chinese money.
China is not the only country in this shape, however. Japan, South Korea, Taiwan and India, with US $3 trillion in cash reserves in the United States, are in the same boat. None of their cash can ever be repatriated fully. All this cash is goodwill security to let these countries sell their goods and services in the United States.
Why then is the United States so unconcerned about spending other people's money? President Ronald Reagan, in 1984, said, "Let us see who comes to collect." Truthfully, these countries will not dare to come and take their money. Hence the United States can live quite happily on other people's money.
The current economic order, established in the last 20 years, will continue for awhile. Cheap Chinese labor will continue to pay for U.S. mortgages and finance wars. It is smart people who will maintain a reasonable horde of cash and still maintain 8-10 percent growth.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
