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With the financial crisis across the whole world, the value of money is accelerating at a very h9igh rate and becoming not worthy the paper it is printed. However some of the nations seem to be experiencing more crisis than the others. United States is counted among the victorious nations of the world but financial wise it seems to be challenged by others like China. The United States is becoming a vassal state of China since the Chinese are working hard to outdo the Americans in everything including learning English than the American natives do. This research paper considers the effects of China's investment on American currency.
China's investments and the value of the U.S. dollar
China has been and is still well known for its stability n commerce, it operates like one big business who's everything is well designed for the assurance of the advancement of the entire business, china. The China's enlarged investment in euro-linked and yen-linked products in empowering up the currencies against the U S dollars and enabling to keep Chinese exports competitive. Many of the China's business people are investing in America and struggling hard to ensure that they are successful in their operations. They buy the assets and raw materials from the nation but do not their manufactured goods. The Chinese manufactured goods are all over the local markets in America. This has resulted to the decline of the value of the American cu8rrency as the prices of the commodities are rapidly increased to earn more income (Cohen & Bradford, 2009).
BEIJING is a China's Investment Corp (CIC) which is the country's long-awaited gigantic investment of the state. It is meant use the huge foreign exchange set aside for the overseas investments. The CIC which is a registered capital of US$200 billion is whole a state own organization. In a non-voting share, the company made its first investments worth US$3 billion, in the US private equity firm-the Blackstone Group. The Ministry of Finance promised to keep on pouring more foreign exchange in the growing company subsequent to the bonds of issuances of special treasury. The legislature of China approved the special issuance of 1.55 trillion yuan in treasury bonds (US$200 billion) for the new company. The company is expected to mainly pursue a combination of the investments in the overseas of eth financial markets. It is also expected to conquest the existing businesses in central Huijin. These businesses have introduced capital to the domestic financial institutions for the support of their reforms, for example, shareholding reforms of the China's banks which are owned by the state.
CIC operates in completely commercial ways in spite of the strong back up from the government. The founder says that it is intended to deal with the Forex business investments through persisting in the efforts to separate the functions of the government from those of the organization's management. It is also intended to ease the rising pressure of foreign currency as well as the absorption of the liquidity of market (Martin, 2010).
There are many factors that affect the value of the US dollar based on foreign investments. The balance of investment and trade is considered to be the leading influence on the value of the dollar; this is in reference to the current account as a representative of the gap between the United States' imports and exports of goods and services. The current account balance also known as the balance of trade represents the value of the differences between the goods and services which are imported and exported in and out of the nation. In the peak season of globalization, the US is running a trade deficit with the rest of the world especially the nations which are well established commercially like China. the exchange of goods and services between China and US is not well balanced with small rate of consumption of the US manufactured goods even after investing in it, China only acquires the raw materials for its investments but rarely consumes the locally manufactured goods. China is also in a position to import more goods and services than it exports from US, for example, at $2 billion a day and more per day, the deficit of trade is causing nervousness in the foreign investors and affects the value of the dollar is significantly affected (Madura, 2008).
The prices of the commodities which are imported from China have fallen rapidly as the foreign investors struggle to create market in the locality. These goods and services have attracted the attention of the local buyers since the American consumers try to go for the cheapest. This has created a large trade deficit; on the other hand, the prices of the foreign commodities in America can rapidly increase through the natural inflation rates or as a result of the increase in demand thus diverting the attraction of the local consumers to locally manufactured goods thus reducing the trade deficit. This has a positive effect in the value of the dollar. Balancing of the investments also affects the value of dollar; when the imports from China are more than the exports of the American commodities means that the Chinese investors have to buy the assets from America so as to secure the value of the dollar from falling and if the imports are more than the exports the foreign investors are expected to more dollar-denominated assets for example the bonds or treasury securities in order to cover the differences hence maintain the value of dollars (Helleiner & Kirshner, 2009).
The political impacts of the dollar does not only depend on the activities of us but is also influenced by what is happening across the world. for instance a change in the foreign reserves; the US dollar benefits mostly from being the reserve currency of the entire world, the central banks in the other countries hold more dollars than the currencies of the other nations although it faces more issues when these nations decides to diversify the investments of their currencies. This mostly happens when they sell the dollars at any price, reduce the amount that they exchange the dollars with or stop buying it completely. For example, China mostly aff4ects the value of dollar when it decides to reduce or stop increasing its foreign reserves thus disposing the dollars in its reservoirs by either selling it or completely stopping to buy it. The value of this currency reduces due to the reduction in the demand of the currency.
Investments of China in United States has caused the increase in more supply of the denominations, more dollars are needed in circulation thus the increased need in their supply. Every dollar which is printed holds less value than before. The more dollars there are in circulation the less the value because the supply has been increased. This is because of the rapid increase in inflation which reduces the value of Dollar (Chow, 2007).
The investment of China has affected the consumption of the locally manufactured goods because the local consumers opt to go for the foreign manufactured goods whose prices are less than the locally manufactured. This result to low growth in manufacturing thus general delay in the economy development hence causing the investors to be distrustful of the dollar. China acquires raw materials for their manufacturing industries from US but sells the final products at a fair price thus attracting the attention of most of the consumers. This means that the manufacturing industries are forced to reduce their manufacturing levels thus affecting their economy (Gitman & McDaniel, 2008).
United States is considered to be one of the well established nations considering all the factors, like economic, political and social. Their currency is considered by most of the world nations for their foreign reserves thus most of the Central Banks are keen on the amount of dollars they have in their reservoirs. With the financial crisis the value of the well treasured currency is becoming unstable due to existence of various factors affecting them. Foreign investments in the nation is considered to be one and the main factor facilitating the value of the currency, for example, China has invested more in the nation and is held responsible for both positive and negative changes in the value of the currency. Investment of China in US results to high inflation which cause decrease in the value of dollars but a times it causes low inflation resulting to increase in the value of the currency.