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yuanThis story–Can China buck the dollar?–is interesting in itself, but is also a great review of international trade and all the links between exchange rates, trade, and international debt.

The setting is China’s huge holdings of US Treasury Bonds, one way the US has financed its huge deficits over the last many years. China has been anxious to buy the notes because it helps keep the value of the Yuan low against other currencies, and that encourages demand for Chinese exports.

One theme of the story now is that U.S. debt is growing so huge that the debt will devalue and China’s pay-off will be too small. What can China do? Sell the treasury notes and stop buying? That will devalue the dollar and the demand for Chinese exports will fall.

Replacing the dollar with the Yuan as the wold’s reserve currency seems unrealistic, and the article as much as says that. But the headline gets your attention.

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