When a giant is about to fall, you should give him certain support to help him to fall down slowly instead of his falling down all of a sudden, or you would be the one who suffers. That's why I said "China should coordinate the gradual fall of the U.S." instead of allowing her to collapse all at once.
Sohu Business: After S&P downgraded the credit rating of U.S. treasury bonds, the over $1 trillion U.S. treasury bonds held by China became the prime concern of our people. Will the U.S.–Teasury-Bond Crisis affect the security of China's foreign exchange reserve?
Sheng Hong: Surely it will, but not seriously. The effects would be in the form of so-called "assets depraciation." Through raising the debt ceiling, the U.S. actually meant to perform its obligation of paying debts in the manner of "rolling over old debts with new borrowing," which was in fact an act of bankruptcy from a business perspective. It's only because the U.S. is a special country that it can use this manner. In reality, the credit of U.S. treasury bonds has already been seriously damaged.
If the U.S. wants to borrow again, it must pay more costs. Because its credit rating has been downgraded, it has to pay more interests to make up for this part of risks. Meanwhile, the old U.S. debts are also devalued because of their low interest rates. That's why the U.S. treasury bonds held by China are impaired. However, the devaluation does not mean that these assets are not worth a penny. This is impossible. Although the credit rating of U.S. was degraded, the U.S. is still credible, even the most credible one throughout the world.
In the long term, the U.S. is heading towards decline and will become weaker and weaker. However, the so-called "weak" is a comparative word. In comparison with China, the U.S. is still very strong. The U.S. is going down from the summit, whereas China's is climbing up from below.
Sohu Business: That is to say, we do not need to worry about the overall safety of China's foreign exchange reserve over a period of time?
Sheng Hong: Yes, but we still need to be constantly alert. In the long run, the U.S. dollar will gradually weaken and a crash of the currency is possible when it weakens to a certain extent. This is because, one way to solve the U.S. debt problem is to borrow, and another important way is to increase the supply of dollars, which will further weaken the U.S. dollar.
If people lose faith in the U.S. dollar and anticipate the U.S. government to continue the inflation policy, they will sell dollars and aggravate the crash of the currency. This, however, will not happen at once. Moreover, the U.S. government is rather cautious at present. Although it is inclined to a loose monetary policy, including the quantitative easing monetary policy, thus increasing the amount of U.S. dollars, which made up the U.S. fiscal deficit, fiscal problems will soon be reflected in its currency. Therefore, in terms of interests, China must be very careful though this problem will not happen right now and that the U.S. dollar is still stronger than the RMB now; in terms of strategies, China should pay more attention to and begin to make preparations for it. Or it would be too late to prepare when that day comes.
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