Thanks guys for the great discussion.

Despite a lot of talks about what
China would do about its Treasury holdings and foreign reserves, China can’t
recycle much of it domestically, because it will likely force the renminbi to
appreciate considerably or create quantitative (or bona fide) inflationary
pressures. Also, although that is true that China is "poised to upgrade their
infrastructure," as Bill mentioned, it is rare that front-loading infrastructure
investments show genuine positive return.

I agree will Terry that China
so far hasn’t been quite successful utilizing its huge foreign reserves and
leveraging them for overseas ventures, precisely because such external
attentions are misdirected, and, at this stage, China would much better off by
focusing more strictly on domestic development, which does not necessarily mean
government-directed infrastructure investments but export/private-sector driven
free market activities.

Given the amounts of China’s trade surplus, it
is easy to blame the renminbi exchange rate for an unlevel playing field,
although the actual culprit is low labor cost, while trade surplus is funneled
into the domestic economy, pushing up labor and other production costs and
slowly reaching parity without wreaking havoc by abruptly adjusting the exchange

Due to the recent turmoil in the financial market, it seems
prudent or even necessary to strike a grand political bargain between Western
governments and China with regards to the latter’s large "currency reserves
towards a mutually-agreed upon and negotiated ‘global stakeholder’ objective,"
as Terry argued, but I doubt such a deal or "Bretton Woods II" will be so
crucial as long as the lender of last resort, the US Treasury remains there to
provide liquidity.

Or, China may not have much extra clout to help the
West anyway, unless the Chinese government mistakenly believes that it can
embark on mercantilist adventures with "only" $2 trillion of foreign reserves,
which aren’t that large considering that they are shared by "300 million first
world people and a billion illiterate peasants," as Bill characterized (although
many of a billion peasants are probably fairly literate yet quite impoverished).

Parts of domestic market protection that were phased out as the result
of the WTO entry also helped some of those billion peasants improve their lives
and their families’ as migrant workers, but the task ahead is still daunting,
and precisely because of that, I’m concerned with the Chinese government’s
uncharacteristically myopic strategy to front-load sizable infrastructure
investments this year and next, which will likely widen the gap between well-off
urban and disadvantaged rural residents.