The Foreign Reserve

  The Foreign Reserve has been bloated to 2.85 trillion. Most of that reserve is in the value of foreign debt. Thus China has not yet tasted the sweet and fat that comes from its export revenue. China could purchase technology, but that would not maximize the benefit that can be derived from China's foreign reserve. There is a considerable premium placed on technology when ever it is sold. Iron ore costs no more than 100 dollars a ton. So why does a 4 pound production sword cost 400 dollars? Why does a vehicle cost 15,000? Because a considerable fraction of the costs comes mainly from labor. When ever you purchase steak and potatoes from a restaurant, the cost is not simply the going market price for steak and potatoes. But the price that must be paid to the chef, the waiters, busboys, owners, rent, electricity, taxes and finally the cost of raw materials that is cows and potatoes. Thus a considerable premium is placed on steak and potatoes served at a restaurant.

  By only purchasing raw materials, the only premium that must be paid is for the raw material itself. The wages and profits that must be distributed to the miners and the owners of the mine. Thus it would make more sense for China to simply import the raw materials and manufacture the product themselves.

  Europe is China's largest trade partner. Thus China feels the need to purchase European treasury bonds so that that they can continue to have the income available to purchase Chinese goods. If Europe buys 300 billion Euros worth of Chinese goods that leaves Europeans 300 billion Euros short to make the same purchase next year. Thus China loans back the 300 billion Euros to Europe so that it can make a repeat purchase the next year.

 The Chinese exporters are not interested in the Euros, they are interested in the RMB because they must pay rent, taxes, electricity, wages, all in RMB. Thus the exchange rate must be favorable enough so that the Euros that they make can be exchanged for enough RMB that can pay for these expenses. In order to make sure enough RMB is available to these exporters to pay these expenses, RMB must be created out of thin air to exchange for these Euros. All of which creates a considerable strain in the form of inflation to the Chinese economy.

 This is a rather silly relationship that only serves to keep Chinese exporters wealthy and the employees who work for those exporters to continue to have jobs. But this Keynesian dilemma could have been organized around any kind of system besides exports. It could have been centered around health care and education. It could have been centered around military spending.

 China could have kept loaning itself 300 billion Euros worth of Yuan year after year to keep building J20s so as to keep PLA military contractors wealthy, and the people who work for those contractors to continue to have jobs. Since we have already accepted to endure the strain of inflation that comes from having to export goods to foreign markets. What consequence would there be if China simply endured that inflation for an entirely different objective. Which is from military spending.