China Drowning in Money: What It Means for the U.S.

While attention is focused on when the People’s Republic of China (PRC) might catch the U.S. in terms of GDP, it has already passed the U.S. on some measures of its monetary base. Such high liquidity typically precedes periods of stagnation or even outright economic contraction. It is one of the surer reasons for anticipating that China’s true economic growth might slow sharply, a possibility that has clear implications for American policy. Moreover, excess Chinese liquidity has already had an impact in the U.S. The two economies are linked by Beijing’s chosen balance-of-payments rules, which tie the yuan to the dollar and compel the PRC to hold excess reserves in American bonds. The U.S. has its own money supply management challenges, and communication between the two countries’ monetary authorities will be valuable.

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