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| China-Japan-Koreas |
| China signals switch in reserves away from dollar |
| 2006-01-06 |
| China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds â a potential shift with significant implications for global financial and commodity markets. Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves â currently accumulating at about $15bn (â¬12.4bn) a month â it could put heavy downward pressure on the greenback. In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to âimprove the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assetsâ. It went on: â[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves. âWe want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment." The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year. The regulator also said it would end quotas on the amount of foreign currency Chinese companies can acquire to invest in overseas assets, a decision that removes a bureaucratic hurdle facing companies that plan to make international acquisitions. The statement comes at a time of growing debate in China on how the reserves are invested. Some economists have called on Beijing to use the funds to finance infrastructure investment and clean up state-owned companies, or to invest in higher-yielding assets rather than financing US borrowing. However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was âvagueâ, Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets. âIt is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,â he said. The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last Julyâs 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar. John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. âThe trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,â he said. However, some economists believe it would be a mistake for China to shift its reserves into domestic investment or other asset classes. |
| Posted by:Steve White |
| #8 Lest anyone get too worried about China throwing its financial muscle about, look at the following from samizdata by an Australian banker: http://www.samizdata.net/blog/archives/008435.html During the 80's everyone was convinced that Japan was going to rule the world, just before they slipped into a long term depression. ...In 2002, Chinese officials admitted that 25% of the loans written by the state owned banks were non-performing. Standard and Poors and a number of others said it was closer to 50%, and possibly more.... most or all of the bad loans have been transferred to special "asset management" companies set up by the government. I suspect that the banks have been able to revise their non-performing loans (NPL) ratio down so quickly by performing a debt-to-equity swap with these holding companies. The article linked to immediately above believes the asset management companies have taken a chunk of the banks' loans and issued them with 10 year bonds in return....At the end of the day, someone has to pay the tab - at some stage depositors are going to want their money. The equity in these holding companies is effectively (if not nominally for the time being) worthless - after all, their assets consist of a bunch of loans that will never be repaid.....I believe that the Chinese banking sector's dire straits constitute the gravest threat to global stability in the coming years. ... Frankly, I believe the banking sector is too far gone to reform without collapse. In international terms, the crisis in the Chinese banks and SOEs is an elephant that stands in the middle of the room, but everyone is either perceiving it as a mouse or trying to pass it off as a mouse....the Chinese state is very brittle and unlikely to withstand economic collapse. The massively stimulating US$50 billion or thereabouts annual injection of foreign direct investment is holding the Chinese state together for the time being. ...And the collapse could come sooner than we think. In 2007, as per the agreement China entered into upon joining the WTO, it must open up its retail banking sector to foreign banks. This is a potential tripwire. Even if only a small number of Chinese are concerned about the health of their local banks (and thus their savings), when Citibank opens up next door the run on Chinese banks could easily spin out of control. ... Among China's many structural problems, the house of cards that is her banking system is probably the worst. Japan's financial slide started shortly after her banking system was shown to be corrupt and its loan portfolios wishful thinking. The Chinese are playing with fire if they do anything to jeopardize the inflow of US dollars. Cheap labor is available in other places like India. They need the US much more than the US needs China. |
| Posted by: RWV 2006-01-06 22:16 |
| #7 Oh, and that 9% growth... ROTFL. The Chinese are continuing their debt shell game. The latest is that they're moving unproductive loans from banks to "trusts" which will issue bonds to cover the purchases. The Chinese continue to make it nearly impossible for foreign banks to purchase debt at the normal fire sale pricing, which is how the Japanese ended their miseries. For now, the Chinese continue their Ponzi scheme, and if the "trusts" crash, oh, well... |
| Posted by: Chuck Simmins 2006-01-06 10:53 |
| #6 This is old news, repackaged. When they revalued the yuan in July they stated that they would be moving towards investing in other currencies. What they're doing is changing the mix in their purchases, and not by a whole lot. The only move I can see that would make sense for the folks in the Middle Kingdom would be investment in the Taiwanese currency. This would give them a lever in their on-going push for reunification. The ruble, mmmmmm?? The dollar is only in danger if another currency is stronger in value. When oil or copper or wheat is priced in euros or rubles internationally, then you worry. Until then, much laughter at the doom sayers. |
| Posted by: Chuck Simmins 2006-01-06 10:47 |
| #5 Zhang's right. There is nothing to worry about here. If there is a problem, it's not the exchange rate of the USD or the AUD for that matter, it's the excess liquity in trusted markets like US and Australian real estate. Markets always correct their excesses. |
| Posted by: phil_b 2006-01-06 02:11 |
| #4 seafarious: So...which currency are they looking to move *to*? It's nice to want to move *away* from the dollar, but what options do they have? The Soddies tried to move to the euro, but changed their minds shortly thereafter. I detect a note of concern here. But there's nothing to worry about, even if they do move away from the dollar. If this actually happened, that would be advantageous for the US, since a weaker American currency would mean more competitive exports. A weak currency would win a lot of large deals for things like aircraft and earth-moving equipment. And higher interest rates would curb the huge speculative bubble in real estate that is continuing to inflate. |
| Posted by: Zhang Fei 2006-01-06 01:28 |
| #3 Big Mistake if they know what is what is at stake. |
| Posted by: newc 2006-01-06 01:23 |
| #2 Does anyone in the MSM understand math? China has a growth rate of 9.1% per year according to the CIA World Factbook. Even if they start buying Euro-debt, they will still have lot's of excess dollars lying around to buy US Treasury Debt with. It's not like they'll just switch over 100% to Euros tomorrow. And why would they want to put heavy downward pressure on the dollar? So that we will buy fewer of their products and slow their growth -- growth that they desperately need to keep the proles from revolting? The second to last paragraph says it all. We threatened them, so they are threatening us. This is a non-issue. |
| Posted by: 11A5S 2006-01-06 00:34 |
| #1 So...which currency are they looking to move *to*? It's nice to want to move *away* from the dollar, but what options do they have? The Soddies tried to move to the euro, but changed their minds shortly thereafter. |
| Posted by: Seafarious 2006-01-06 00:19 |