We consider here the $2 1012 held by China. We ignore here such details as whether these assets are bonds, currency or mere bank accounts. The Chinese have worked very hard the last several decades producing goods and selling them to us for dollars. Recently the FED created $1011 out of thin air and bought treasury notes on the open market. This action at once increased and decreased the value of such notes—increased because they were bought on the open market, decreased because the notes are claims on dollars whose value is decreased by such creation of money.

In any case China was spooked and suggested, once more, some new sort of ‘reserve currency’.

I distinguish in this note at least, ‘saving’ and ‘investing’, roughly as economists do I think.

Saving
is appointing some specialized institution to hold and perhaps invest your money for some long period of time, anticipating some future period when you will draw on it. The money will then presumably be returned with interest.
Investing
is when you choose and sponsor some activity that promises to create wealth, sooner or later, and tend to that activity. A banker invests when he loans money to build a store.
With this distinction and notions of fractional reserve banking, we might say that saving merely appoints someone else to invest on your behalf.

In these terms we can say that China is saving but not investing. They implicitly trust the United States to invest their money. They treat the US as a bank. They are rightfully worried. It would appear that we are merely consuming their excess production of goods. We built houses for a couple of decades and allocated them to people who are increasingly seen as unable to produce the wealth that would warrant those houses. We are losing our credibility as the world’s bank, but no other such putative bank is rising to displace it.

If one tries to describe China’s strategy as investment then one must ask “What does China expect to get in return?”. Perhaps they anticipate that their one child policy will lead to a period when there are more pensioners than workers. Drawing on ‘banked reserves’ could ameliorate this situation. But this means that China buys goods from America thus repatriating some of the dollars. No one seems to anticipate this however; but what else is their dollar accumulation for?

China can use their money to become a world power without the political expense of military ventures. I suspect they will not invest their money abroad except in expectation of profit. (That is in contrast to our African ‘investments’.) While individual Chinese have done well as foreign entrepreneurs, historically China has not sought world power.