Why China? Ferguson explains:
It is not widely recognised that the US is currently being subsidised by foreign monetary authorities, mostly Asian. Central banks, led by the People's Bank of China, are financing about 75%-85% of the US current account deficit. In essence, the Chinese are buying dollars and US bonds to prevent their own currency appreciating against the dollar, which would in turn hurt exports.
Not only are the returns on these dollar holdings miserably low, but as the US "twin deficits" grow, the exposure of China's central bank to a dollar devaluation grows. According to a recent estimate, if the yuan appreciated by 33% against the dollar, it would inflict a capital loss on the People's Bank equivalent to 10% of GDP.
From an American perspective, this arrangement is just fine. American consumption and foreign policy are effectively being paid for with low-interest loans from Asia, allowing the Bush administration to give American voters both butter (tax cuts) and guns (the occupation of Iraq). And economic interdependence notionally reduces the risk of Sino-American disagreements on strategic matters, notably North Korea but also Taiwan. Yet the Chinese must be feeling nervous. It clearly makes sense for them to reduce their economic dependence on the US export market and their exposure to the dollar.
And how do they do this? Why, by turning to Europe and the euro. Ferguson posits that French president Jacques Chirac's visit to China a few months ago was "to woo China from the American embrace."
George W Bush must be thinking, "darn, I know I can handle Iraq, and Iran and North Korea. But how the hell do we beat these Europeans?"