Understanding China's forex reserves

James Fallows has an excellent article in the just-posted January/February issue of The Atlantic that examines the complex and often misunderstood issues surrounding China's mountain of US-dollar reserves. It is probably the most patient, jargon-free and, above all, clearest explanation of the issue I have read.

Among the issues elucidated are what China's high savings rate means (and doesn't mean), the prickly situation created by the plunging dollar, and the challenges ahead for CIC, China's new sovereign wealth fund charged with investing some US$200 billion of that money (a third of which is to be invested overseas). The article, which can be found here (on the free portion of the site, for once), is especially helpful in highlighting the potentially very dangerous co-dependent nature of the Chinese and American economies. Well worth a read.