Either way, China loses

The problem of the dollar is haunting China during these times and secondarily the Euro likely is haunting China now as well. As western countries do whatever they can to survive the present messes they are in China who has heavily invested in Western Countries especially the U.S. can't win in the present world dynamics in regard to their dollars or their euros.

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http://news.yahoo.com/analysis-china-left-holding-credit-baby-075738493.html

The old adage says you have a problem if you owe the bank a thousand dollars, but the bank has a problem if you owe it a million.

China has lent the United States up to $2 trillion -- that's 30 percent of Chinese annual output banked in one country -- and probably the lion's share of the rest of its $3.2 trillion of hard currency savings to European governments.

Its ire -- and presumably that of other surplus nations and institutions who've always lent to the United States because they were sure of getting all their money back -- is that it's now a captive creditor that may well be raided.

Even if default fears seem overblown -- despite Standard & Poor's removal of the United States AAA rating last week and market fears about Italian or Spanish solvency -- mounting market unease at governments' inability to assuage creditors is in itself set to sap economic growth critical to long-term debt sustainability.

And that's where confidence spirals get out of control.

"EITHER WAY, CHINA LOSES"

For big creditors like China, it's a triple whammy.

Faltering western demand saps China's own export-driven growth, its hard cash savings are undermined by previously unthinkable credit concerns, and the likely policy response to western demand shocks will be more money printing.

That money printing, according to HSBC chief global economist Stephen King, simply weakens the dollar while keeping bond yields low, transferring the debt burden to foreign creditors who see the dollar value of their assets dwindle for the sake of supporting US exports and growth.

The Chinese could try to print more money too, but that would be dangerous socially as local inflation is already unacceptably high. Threats to sell U.S. assets are similarly self-defeating as any resulting run on the Treasury market now would likely have the same short-term valuation consequences.

"Either way, China loses," King wrote, adding there were then two scenarios -- one 'good', involving a long-elusive G20 grand bargain on policies to cut global imbalances, and one 'terrifying', where China gets so irked at being cornered that it purposely precipitates a U.S. and global financial crisis. end quote.

The real problem would be if China got so pissed off that it purposely precipitated a global financial crisis. But even that is crazy because China would be shooting itself in its own foot and sometimes self inflicted wounds don't heal. All nations now are like family. What happens now to one happens to all.