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Principles of Economics- Mankiw (5th) 674

Principles of Economics- Mankiw (5th) 674 - 696 PA R T E L...

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696 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES T HIS ARTICLE DESCRIBES HOW CAPITAL IS flowing from China into the United States. Can you predict what would happen to the U.S. economy if these capital flows stopped? C h i n a , o f A l l P l a c e s , S e n d s C a p i t a l t o U . S . B Y C RAIG S. S MITH S HANGHAI , C HINA —A giant, developing nation bordered by an economic quag- mire is an unlikely source of capital for the world’s industrialized powers. But China, with fat trade surpluses and bulg- ing foreign-exchange reserves, is buying U.S. government securities, especially Treasury bonds and bonds issued by Fannie Mae and Freddie Mac. That’s good for America. Such in- vestments add liquidity to the U.S. hous- ing market and help hold down U.S. interest rates. And China is likely to con- tinue to buy a lot of U.S. debt for years to come. Thanks to high domestic savings, a continuing inflow of foreign investment and tight controls on domestic spending, China is awash in capital. Last year’s capital surplus . . . reached an estimated
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