What to do with $3.2 trillion?

The EU Embassy in Beijing. Photo: Nelson Ching/Bloomberg News

China has the world’s largest storehouse of foreign currency – about $3.2 trillion worth.  Much of it is invested in US Treasury bonds, but the EU has recently been making noises about trying to get China to invest some of that pile of cash into the European Central Bank to prop up defaulting countries like Greece and help stave off the collapse of the euro.  It’s in China’s interest, of course, to keep the European economy healthy, since the EU is one of the major world markets for Chinese products.  But it does raise the odd notion of a country with a GDP per capita of about $7,500 propping-up countries with roughly four times the wealth.  Greece’s GDP per capita is about $28,000.  If China were to play a major role in staving off a European financial meltdown, then the sacrifices made by poor migrant workers who provide the laboring core of China’s globalized manufacturing sector, and by China’s middle-class who save their money despite low interest rates (enabling China’s banks to loan more money to state-owned enterprises), will not only be helping China’s economic growth but Europe’s too!  It’s hard to say what benefits the working and middle classes are getting out of this, or what the payoff for their sacrifice will be.  Their payoff is abstract (maintaining global market stability and contributing to ‘China’s rise’) while the benefit to Europe is much more concrete and immediate.

However, it’s also worth pointing out that Chinese workers aren’t the only ones who might sacrifice to keep world finances in order.  Working people all over are being asked to forgo the benefits of a prosperous society in order to prop up banks that have been reckless with their money.  That’s why there have been riots in Greece and Italy, where EU-imposed austerity measures disproportionately impact the working classes, and that’s why the Occupy Wall Street protests have struck such a cord in this country.

So, what should China be doing with all that money?  Investing in rural Guizhou instead of the European Central Bank?  Well, yes – but of course it’s never that simple.   Converting foreign reserves into yuan could create a jump in domestic inflation, which would also disproportionately harm the poor.  It may make more sense to keep foreign reserves for foreign investment.  The real question lies in finding a way for those foreign investments to more directly benefit working people in China.

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