Hidden Costs of China's Exchange Rate Policy

Developing countries like China and Russia continue to invest billions of dollars in American government bonds which are a low risk, low return choice. In the NY Times, Mr. Eduardo Porter notes:   

"It is an irony of our times that the majority of the world's poorest people now live in countries with vast international financial reserves," Lawrence H. Summers, the president of Harvard and a former Treasury secretary, told an audience of Indian economists in Mumbai last month. "It seems appropriate that part of the focus of the international financial architecture move toward the challenge of deploying their large reserves as effectively as possible."

There is a logic to this investment strategy, unprofitable as it is. The Treasury bond binge by China is part of a policy of exchange-rate management to keep the value of its currency competitive against the dollar — a core component of the nation's export-led economic strategy.

To read more:

http://www.nytimes.com/2006/04/30/business/yourmoney/30view.html?_r=1&8ym&emc=ym&oref=slogin