China’s rising middle class could lead to an economic explosion, as you mentioned, or it could lead to a political disaster (and thus an economic concern). As the middle class rises and the rural-ites sit idly by, that could be cause for concern for the people in charge of upholding the status quo.

And I apologize, I didn’t mean to come off as saying they are an “economic dependent.” Rather, I would say there is a lot of economic interdependence… globally, not just for China and the US. The string of webs created by globalism has led to a situation where everyone has some sort of dependence on each other. This can be evidenced by the fact that we influence Chinese decisions and they influence ours.

I just wrote this article to address the concern that China wants to dump our dollar. They have made it pretty clear that their long-term strategy is to diversify as any wise investor should do. But in the short-term and near-term, they aren’t sending many signals that are cause for concern. They have the to be expected jitters about the weakening dollar, but they understand that they aren’t in a place right now to give up our consumption (even if that means continuing to devalue their own currency).

That doesn’t sound conspiratorial, it makes perfect sense. That’s what I was getting at towards the end of the article. Any meetings between China and the US is no longer us slapping their hands saying “Bad!”… it will now include their demands and expectations. They have bought a seat at the discussion table, essentially.

However, the threat of them dumping dollars into the market is more of an idle threat. That would cause a much larger global catastrophe than is worth it for them. You have to consider their options. As I said, they could get rid of dollars, but then the renminbi would pretty much have to go up in value. If that goes up in value, their exports would become less valuable. That isn’t good for a country that is based on export-led growth. Add in the fact that biting the hand that feeds you isn’t a good idea, and where do they stand? They don’t want us to devalue our currency (and we don’t want to, either… at least not majorly), but they don’t have much recourse if we do.

Their best move is to move towards a diversified portfolio after the global recession is over.

If China has massive stockpiles of US dollars, the threat of dumping them on the market (greatly devaluing the US dollar) seems like a reasonable way of preventing the US Government printing more Monopoly money.

To me, it’s almost like an economic version of Mutually Assured Destruction. I’m no where near a Forex expert, but it’s interesting to watch leverage game play out on such a large stage.
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