[T]he free ride China has been giving America, in which the world's richest economy has been getting cheap loans from a country that is dynamic but still quite poor, may be coming to an end.
It's all about which way the capital is flowing.
Capital usually flows from mature, developed economies to less-developed economies on their way up. For example, a lot of America's growth in the 19th century was financed by investors from Britain, which was already industrialized.
A decade ago, before the world financial crisis of 1997-1998, capital movements seemed to fit the historic pattern, as funds flowed from Japan and Western nations to "emerging markets" in Asia and Latin America. But these days things are running in reverse: capital is flowing out of emerging markets, especially China, and into the United States.
This uphill flow isn't the result of private-sector decisions; it's the result of official policy. To keep China's currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds.
One way to grasp how weird this policy is would be to think about what a comparable policy would look like in the United States, scaled up to match the size of our economy. It's as if last year the U.S. government invested US$1 trillion of taxpayers' money in low-interest Japanese bonds, and this year looks set to invest an additional US$1.5 trillion the same way.
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