In answers to the Wall Street Journal’s written questions, Chinese President Hu Jintao expressed his Country’s concerns about the stability of the U.S. dollar stating that the U.S. dollar-dominated worldwide currency system is a “product of the past“. Hu also criticized the U.S. Federal Reserve huge bond purchases the past two years (quantitative easing) as being inflationary.
The Chinese comments should not be taken lightly. China has a historical habit of acting on comments it makes to the international community.
China holds nearly $3 trillion. Many economists believe that these huge holdings will stop China from taking action that would hurt the value of the U.S. dollar. However, that conclusion is based in a vacuum that does not consider China’s larger strategic interests in the world and the Pacific Rim specifically. Should China see a further weakening of its U.S. dollar holdings as inevitable, it may decide to precipitate that drop for strategic reasons. That would most certainly bring inflation to the United States.