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.