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  China affects US interest rates

LowerMyBills By Daniel R. Levy - July 2005

Most experts think that China is unwillingness to allow its currency (the Yuan) to appreciate against the US$ is the key factor behind the low interest rate structure in the US.

The Chinese currency was hooked to the US$ at 8.276 Yuan. Given Chinas growing trade surplus with the US, the Yuan will have to appreciate more than the last appreciation and this in turn will push the US interest rate structure higher.

Chinese authorities are buying all the US dollars earned through exports and capital inflows and investing them in US Treasury securities to prevent upward pressure on the Yuan. As a result, on account of relatively low yields on Treasuries the mortgage rate is much lower than it would have been if not for Chinese buying, or so it held. For example, in April the rate on the 30-year conventional mortgage stood at 5.86 per cent against 5.93 per cent in March. As a result of the relatively low level of the mortgage rate the housing market and general economic activity remain buoyant.

Now That China start to cut its support for the US$ and let the Yuan appreciate this start pushing the US interests rate up. This in turn can rush the US housing bubble and push the economy into recession.

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