"China Inside Out" Chapter 8

In chapter 8 of “China Inside Out”, Bill Dodson talks about the value of the Chinese yuan, an important detail in economics because it literally determines how expensive goods purchased in China are. While the value of the United States dollar fluctuated, China kept the value of the yuan the same, so that while goods might become more and more expensive in the United States, they would stay cheaper in China. Because of this, many consumers in other countries, including the U.S., go to China to get their products at a much cheaper rate than buying locally made goods. In this way, China continually keeps doing business with the United States. To make sure that the U.S. economy remains healthy, China began buying Treasury bills to keep interest rates low, preventing inflation. In this way, however, China created a “Dollar Trap”, a term coined by economist Paul Krugman that refers to China being unable to get rid of their U.S. Treasury bills (Dodson 173). According to Dodson, “China... had to continue buying dollar denominated Treasury bills from America... to maintain the value of the debt... China... already invested” (Dodson 165). Namely, China can not stop investing in the United States because that would destroy what they already had invested and possibly devastate their economy. While Dodson assures his readers that China will not be ruling the world's economy any time soon, he does note that America's debt is getting out of hand. US$2 trillion is already in China's hands, and now they saying that “the U.S. Should no longer have debt so cheaply if [it]... can no longer balance its books”, and more and more countries are adding their voices to China's, saying the same thing (Dodson 177). Overall, the value of the yuan is important because so many economies now depend on China, China's money, and the goods that China produces, so it being stable helps the global economy remain stable.