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? China, of All Places, Sends Capital to 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
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