Why the Fed May Bail Out China

ZURICH â?? The twenty-first-century economy has thus far been shaped by capital flows from China to the United States â?? a pattern that has suppressed global interest rates, helped to reflate the developed worldâ??s leverage bubble, and, through its impact on the currency market, fueled Chinaâ??s meteoric rise. But these were no ordinary capital flows. Rather than being driven by direct or portfolio investment, they came primarily from the Peopleâ??s Bank of China (PBOC), as it amassed $3.5 trillion in foreign reserves â?? largely US Treasury securities.