Project Syndicate - China's bad debtor

China's foreign-exchange reserves, indeed, are facing a triple whammy: a decline in the US dollar's purchasing power, a fall in the prices of US government securities, and possible inflation in the longer run.

The bulk of China's $2.3 trillion in foreign reserves are held not for the purpose of protection against negative external shocks, but as savings in the form of US Treasury notes. China thus needs to preserve the value of its savings.
But there is no question whatsoever that the US dollar will go south in the long run - a depreciation that started in April 2002 and, after a short interval, resumed in March 2009. Unless the US economy improves its trade balance, the dollar will fall. But the US cannot improve its trade balance unless the dollar falls.