I just ran across an interesting post at Marginal Revolution about his Tyler Cowen’s view of the Chinese Central Bank. I’ll throw

Much hinges on whether we expect the Chinese central bank to continue buying U.S. Treasury securities. As many MR readers will know, I am a cautious optimist. I have never been to the Chinese central bank, or spoken with a Chinese central banker, but here is my implicit mental model of how they operate:

1. Intelligence and financial prowess aside, they grew up in an age of Communist terror, or if they are young they heard narrations of such from their parents.

2. They are deathly afraid of making mistakes and causing China to lose face on the global scene.

3. They know full well that the Chinese economy — especially the financial system — is a rickety house of cards. If capital flows out of China were unrestricted, and the yuan allowed to float freely, a financial collapse would come within five years. They see us as propping up their currency, rather than vice versa. Most of all, they want to be holding safe assets, in case the worst should happen. They are risk-averse bureaucrats.

That’s part of the list, but what it seems to come down to is that over at the Chinese Central Bank, the motto is, “Nobody ever got fired for buying US Dollars.”

Further down the list, it gets even more interesting because it adds another piece to the puzzle:

5. They don’t much care if they suffer capital losses on their dollar-based endowment, evaluated in terms of the relative exchange rate with the yuan.

6. Many Chinese have a highly conspiratorial view of the world. They would expect — indeed “overexpect” U.S. “retaliation” if they suddenly stopped buying Treasury securities.

Does this mean that, on a certain level, they believe they are being extorted by the United States? This would be interesting because, at least to me, this seems like an indicator of building resentment which will get ugly once they finally decide they no longer need our Dollars.

The other piece of the puzzle which doesn’t fit Tyler’s theory (unless #6 is spot on) is why they would continue to purchase dollars which are, as he notes, losing value when they could easily shift their purchases to Euros?

Would some of the actual economists out there care to tell me what they think?