Question

China is widely suspected of “sterilizing” its recent purchases of US dollar assets. Explain how you would examine the validity of this claim. why might china want to do this? are there any any costs associated with this policy?

Answer 1

Solution:-Yes, China is widely suspected of “sterilizing” its recent purchases of US dollar assets and so many costs associated with this policy.Sterilization operations show up on the balance sheet of the Central Bank. To check whether China is sterilizing, you should look to see if the Bank of China’s purchases of US treasury bills is matched by sales of domestic government bonds. China might want to do this in order to prevent excessive money creation and inflation. Without sterilization, central bank purchases of US assets would increase the Chinese money supply, and this would tend to lower interest rates, and potentially create financial market ‘bubbles’. The cost from doing this is that the Chinese government ends up holding low interest US assets, and paying higher interest on its domestic bonds.