This might or might not be contractionary from the point of view of GDP - which is the next part of the question.
What's strange to the point of being exotic is that apparently China was flooding the US economy with a savings glut, creating this danger of contraction, while simultaneously leaching money out of the US by way of its aggressive export strategy.
This only makes sense if you can accept that dollar reserves appear in at least two and possibly three places at the same time.
They're part of the US balance sheet, included in whatever it is that the Fed does when it tries to pretend to balance the monetarist books.
They're owned - or possibly borrowed, it's hard to be sure - by China and other US semi-colonial states, and considered savings.
And some proportion is also invested back in the US money markets as both sovereign funds and private investments, which not only hammer interest rates into the ground but simultaneously help drive a massively leveraged lending bubble.
This is not inflationary, as we all know, because asset inflation isn't counted in the same way as wage inflation or commodity inflation.
Finally - true quantum economics; the same capital, which only exists by fiat anyway, not only appears in many places at the same time, but has opposing effects depending how you count it.
Nobody in China ever prevented the US from focusing that finance on electrifying the strategic rail network and putting a national inter-regional HVDC grid in place, while establishing feed-in tariffs to encourage investment in domestic renewable energy production.
The decision to use the external finance for a consumption binge rather than an investment drive was entirely made within the US. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Correct me if I'm wrong. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
If the US were to use Chinese finance to build infrastructure, that would attract foreign direct investment in the US, which would tend to push up the value of the US$, which would finance a manufactured goods trade deficit and, yes, the Chinese could shift their focus to maintaining a discount of the yuan/renminbi against the Euro, Yen, Pound Stirling, etc.
But its only perfect information in marginalist modeling that eliminate the impact of timing ... infrastructure construction is an increase in effective demand during the construction of infrastructure ... it is not a contribution to productive potential until it comes online.
Or, for a historical example, after the establishment of the Euro, with the creation of a Euro capital market with the same depth of liquidity as US$ capital markets, and without a foreign exchange risk, there was a substantial amount of acquisition of US-owned Eurozone operations by Eurozone domiciled corporations. As that acquisition wave was in place, it depressed Euro exchange rates against the dollar. Once the wave had passed, with the reduction in income account outflows from the Eurozone to the US, the long term impact was an increase in Euro exchange rates against the dollar.
Of course, with perfect foresight there is no such wave effect ... just as with an adequate wingspan and sufficiently strong flight muscles, pigs could fly and shares in the reinforced umbrella industry would be a growth stock. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
