The bailout and China: The potentially impact extends well beyond U.S. borders

Carrie Reinheimer Oct. 2, 2008 9:34 am

So is there finally a plan to fix the global economy downturn? Well some politicians think there is a plan but others do not, which is causing a big debate in Washington. Monday's no vote came dealt a serious blow to the legislation, which President Bush says is needed to prevent a "painful and lasting" economic downturn and "send a strong signal" of confidence to U.S. markets and restore stability to the global economy The elite politicians are doing what ever they can to pull out this plan. An event that would cause a severe domino effect that would threaten China's growth progress and the entire global economic landscape. The United States and China are the world's largest debtors and creditors, respectively. The two nations rely heavily on each other. While the Chinese government has accumulated huge foreign currency reserves (mostly U.S. dollars), the United States has a federal deficit of $9 trillion. China, which holds about $1 trillion of American debt, would be seriously affected by an American depression, since the resulting inflation would likely further drive down the value of the dollar, making it scarcely worth the paper it is printed on. Economists in China have longed voiced concerns about the long-term outlook for the dollar (given its steady slide), and the proposed bailout would add another $700 billion in debt that could further negatively impact the currency's value, at least in the shorter term. While seemingly far-fetched, should China decide to unload its holdings of U.S. government debt, the consequences are unpredictable and the repercussions of such a move could be economically devastating for China.
This plan sounds like it would work but who knows what would really happen. Things could not fall into place and make things even worse. Chinese exports to the United States are crucial to its economic growth and the bailout package will not help penny-pinching American consumers who are losing their jobs and homes, and are spending a growing chunk of their income on must haves. So who knows how this will affect China if it really goes through. Whatever happens, a change needs to happen to help the economy out of this recession.

http://www.smallcapinvestor.com/smallcapinsights/china/2008-10-02-the_bailout_and_china_the_potentially_impact_extends_well_beyond_us_borders