Think China's a threat to our economy? Think again.

So much for 'foreign' imports. China's announcement that its 2005 global trade surplus tripled to a record $102 billion is apparently very good news for Fortune 500 companies.

About half the exports coming out of China are actually from big foreign multinationals that use the mainland as a production base. They sell most of that stuff in China but also reexport to other markets.

In the Chinese high-tech sector, the percentage actually is closer to 90% penetration by foreigners. Global auto companies such as Volkswagen, General Motors (GM), Toyota (TM), Nissan (NSANY), and Honda (HMC) dominate market share in on the mainland. Global banks such as HSBC (HBC), Bank of America (BAC) , Goldman Sachs (GS), and Citibank (CITI) are making serious inroads into China's rapidly growing banking and financial services markets.

This is actually a win-win arrangement. In fact, some Chinese officials have openly wondered if China's development strategy has been too much of a good thing for the West. One could argue that it's China that faces the risk of losing out by ceding too many key markets to foreign interests in higher-end markets, which could make it difficult for Chinese world-beating companies to emerge.

Now you know where the record corporate profits are coming from.

The corresponding loss of American manufacturing jobs and the lost opportunity for Chinese to develop their own high-tech industries doesn't worry this mainstream media pundit. What does worry him?

the news that China's foreign exchange reserves (which finished 2005 at $819 billion) likely will top $1 trillion in late 2006, overtaking Japan as the country with the biggest stockpile in the world.

One trillion, about half the size of China's total economy, would be an astonishing figure, even for a rapidly developing economy like China.

We're not the only ones in deep doo-doo. Half their wealth is an I.O.U.!

The superfast growth in reserves is being fueled by heavy inflows of foreign money and the repatriation of earnings that Chinese companies earn overseas.

Given China's tight capital controls, a good chunk of that money has to be converted back into yuan and then reinvested by the central bank into other investments, mostly U.S. Treasury bonds and Euro assets.

Now, we see what's bothering him. It's the fact that someone else CONTROLS the money! Why's that a problem?

In recent years that, again, has been a great deal for the U.S., which relies on foreign capital, particularly from Asia, to make up for its massive current-account deficit with the rest of the world.

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China is the No. 2 holder of Treasuries behind Japan, and a sudden pull-out would be felt keenly in both the Treasury bond markets, where long-term interest rates would likely rise, and in the dollar, which would probably tumble and unsettle U.S. stock markets.

We've heard this one before. But, did you ever ask yourself why "long-term interest rates would likely rise?" I mean, if it's only "likely," then that means that it's not necessary, right?

Yeah, you say, but the Fed does it to "control inflation" and "attract investors." If I hear that phony baloney one more time, I am going to SCREAM.

Interest is, by definition, inflationary. It derives its value from the dollar it's collected against, thereby immediately devaluing that dollar the second it attaches to it. Interest CANNOT control inflation; funny money at interest is behind inflation!

As for raising interest rates to "attract investors" in a cash-strapped economy, that's the equivalent of pouring blood in shark infested waters to save the man overboard.

Then, why does the FED raise interest rates even when they know it will drain our economy? Answer: because they CAN!

Now, why would China sell its dollars?

[to] further capital injections into weak Chinese banks that have heavy dud loans, massive infrastructure investments at home, or even bailing out state-owned mainland companies that are struggling. [like the US might do for Ford, GM, and Delphi if Congress had half a brain]

Yes, believe it or not, folks. China may actually do something good for its own people. China might build roads, improve water systems, invest in education and housing for its real wealth - its people - and pull its own domestic economy up by its bootstraps.

China might do what America will never do while the current Administration and incumbent Congress is in power. So, is China a threat because it might do something good for its people? Or, is the real threat from those who don't want any country's people to prosper, including us?

Never fear. This media pundit recommends that the US and China take the following measure to mitigate the danger:

[T]he U.S. [needs to] improve its consumer savings rate and tighten government spending . . . China, in turn, needs to move forward with currency reforms and liberalize its capital controls. [First, let it's currency float aimlessly.]

Longer term, China needs to abandon its tight capital controls . . . [and allow foreign financiers to exploit its] $1.8 trillion in household savings . . . that's largely bottled up inside China's banking system.

Let us manage your money for you; you can't be trusted to manage it yourself.

If China wants to truly avoid the boom-and-bust cycles that have tripped up other economies at this stage of development, it needs a more flexible currency and capital flow regime.

For example, look at the American economy under the Federal Reserve - perfectly stable.