China's central bank has been on a buying spree for the last seven years, taking home $1 trillion worth of U.S. Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
Now the bills are coming due, and the bank doesn't have enough money to pay them.
That's because the bank's U.S. investments, which comprise most of China's foreign securities, are worth a lot less when converted from weak U.S. dollars to stronger yuan, reports The New York Times.
Last year, China spent more than one-eighth of its entire economic output on foreign bonds and has bought even more this year. If it stops buying dollar-denominated securities now, the dollar would tank, and U.S. interest rates would skyrocket.
The situation is so serious that the People's Bank of China, which earlier ignored warnings from the International Monetary Fund that its $3.2 billion capital base is too small, has asked the country's Finance Ministry to help it get more capital.
The move may signal a shift in power from the bank to the Finance Ministry, which has long advocated slowing the yuan's appreciation to increase the global competitiveness of Chinese goods.
The U.S., however, wants a stronger yuan, which would reduce Chinese competitiveness and the U.S. trade deficit as well. The yuan has risen 21 percent against the dollar since mid-2005, when China quit pegging its currency to the dollar.
U.S. Treasury Secretary Henry Paulson, long an advocate of a strong yuan, warned in a recent issue of Foreign Affairs that the Chinese juggernaut is headed for the wall, a serious risk for the rest of the world's economies.
"Americans who worry that China might overtake the United States are worrying about the wrong thing," Paulson wrote.
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