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Is China effectively showing we have simply borrowed too much?
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| MisterOpus1 |
And pretty much has our ass in a vice grip now?:
| quote: | China Set To Reduce Exposure To Dollar
Move Would Probably Push Currency Down
By Peter S. Goodman
Washington Post Foreign Service
Tuesday, January 10, 2006; D01
SHANGHAI, Jan. 9 -- China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday.
As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.
China now boasts the world's second-largest cache of foreign exchange -- behind only Japan -- and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.
In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries -- a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.
The comments of the Chinese senior economist, made on the condition of anonymity because the government disciplines those who speak to the press without express authorization, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve.
In a report circulated this week, Stephen Green, senior economist with the bank Standard Chartered PLC in Shanghai, identified several signals that China is intent on limiting its exposure to the dollar -- not least, a recent pledge from the State Administration of Foreign Exchange to "actively explore more efficient use of our foreign exchange reserves."
"We believe this adds to the downside pressure the USD [U.S. dollar] is currently facing," Green wrote. "It is the first official expression from SAFE that they are looking at switching away" from the dollar.
The comments on SAFE's Web site reinforced earlier public warnings from Yu Yongding, an economist on the monetary policy committee of China's central bank, that the country's reserves are now vulnerable to a drop in the value of the dollar.
"The general trend for the U.S. dollar is continuously weakening," Yu said, speaking to reporters at a conference in Beijing last month. "Countries with huge foreign-exchange reserves will have their assets shrunken."
Last week, Hu Xiaolian, director of the foreign exchange administration, said China plans to "optimize the structure" of its reserves. Analysts took that to mean China would pursue a higher return than it can get from holding dollars by diversifying its reserves.
Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences -- sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets.
"It is thus extremely unlikely that China would do anything to harm its own balance sheet," wrote Stephen Jen, an economist with Morgan Stanley, in a research note distributed Monday.
In 2005, the dollar rebounded against major foreign currencies as the Federal Reserve raised short-term interest rates -- making dollar assets relatively more attractive than others -- but has slid a bit early this year. Meanwhile, China continues to amass foreign-exchange reserves at a pace of roughly $15 billion per month.
Warnings about an impending Chinese sell-off in dollars emerged in July, as China slightly altered the way it sets the value of its currency, the yuan, bumping it up against the dollar by about 2 percent. At the time, China announced that it would gradually allow greater movement in the exchange rate -- something that has yet to materialize -- while also shifting from a system in which the yuan moves with changes in the dollar to one where it tracks a basket of currencies including the yen, the euro, the Hong Kong dollar and the South Korean won.
The move temporarily muted criticism on Capitol Hill from those who accuse China of currency manipulation, asserting that an artificially low yuan has made China's goods unfairly cheap on world markets. But as the implications of the new currency policy rippled out, some analysts suggested that China would thereafter have less need for dollars and greater need for the other currencies in the new basket, sending the greenback down and risking higher U.S. interest rates that would dampen economic growth.
China sought to quash such talk. In September, a senior central bank official told a ballroom full of international executives gathered in Beijing that China would not sell significant quantities of U.S. bonds, cognizant that such a move would "cause the price to plunge."
Even if a Chinese shift away from the dollar weakened the currency, that would probably not soothe tensions with those in Washington calling for an increase in the value of the yuan to help U.S. manufacturers. Unless China severs the link between the value of its currency and the dollar -- a move Beijing says could destabilize its economy -- then a weaker dollar would simply mean a weaker yuan as well, leaving in place the current debate over whether China's export earnings are being netted unfairly.
Special correspondent Eva Woo contributed to this report
http://www.washingtonpost.com/wp-dy...0901042_pf.html |
Alright you econ junkies, please let me know if this is cause for at least a minor alarm. I realize that China wouldn't drop us entirely for their own benefit, but this seems like a slow but sure movement away from the dollar because they seemingly believe we can't make good on our payment.
Am I reading this incorrectly? Because at first blush this has confirmed my weak widdle liberal heart that Bush has not only effectively bankrupted us, but has put us in a worldwide financial bind by borrowing the out of everything to pay for every policy he has created thus far. |
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| Shakka |
Opus, I didn't read the article because if the topic is about what I think it's about, then yes, it is alarming (longer-term concern), but I don't think it's new material in the slightest. Additionally, China may very well be in a bind of their own due to their massive U.S. currency holdings (i.e. if they start selling massive amounts of U.S. currency, it will hurt them as well as they are such large holders). Think of the Asian currency crisis in the '90s. On the flip side, China isn't the only large holder of U.S. Treasuries--if they start selling and the pressure on the dollar is great enough, many other foreign holders might run for the exits.
Now a weaker dollar isn't necessarily a bad thing (though it does make those darn imports near impossible to afford!). In fact, I've heard several notable economists (Most recently Bill Gross, but Warren Buffet, Fred Hickey and some others), claim that the long-term endgame to all of this is a drastically weaker dollar which will then curb imports, help work off the trade deficit, and ultimately help get things back in balance (or at least moreso than they are now).
In any event, the U.S. consumer is tapped out. Without their ever increasing housing ATM Cash-Out refis, the U.S. consumer is really getting strapped. Debt levels in this country are at all time highs. However, at my firm we've been following this for several years now waiting for it to play out and it has gone on a lot longer than we thought it could (The strength of the U.S. consumer).
With new bankruptcy reform kicking in this year, still high energy costs, peaking real estate values, skyrocketing healthcare/insurance costs...it is only a matter of time before the gig is up.
However, this one can't be blamed on Dubya (though probably Greenspan to some extent).;)
Good thing I've already finished up my international travel for the year! It was damn expensive and I actually travelled when the dollar was trading around 90 vs. the Euro. I'd be concerned though. If some of these forecasters are correct, the dollar has a looong way to fall (maybe into the 60s or even lower). Scary thoughts! :nervous: |
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| Purple |
| quote: | Originally posted by Shakka
Additionally, China may very well be in a bind of their own due to their massive U.S. currency holdings (i.e. if they start selling massive amounts of U.S. currency, it will hurt them as well as they are such large holders). |
China dosent have free floating currency so it wont effect them at all. But it will definately effect every other country on this planet directly / indirectly.
I dont understand the economics behind this fixed currency system. I mean they are fixed at 8 Chinese Yaun to 1 USD. Wether dollars falls or it rises China always pays/receives 8 CY.
How they do this? Can anyone explain this to me?
US has begged so many times to China to change this system, but everytime they fail. |
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| emc^2 |
Well, the initial knee-jerk reaction is definitely in order. but let's look at some positives here.
1. sinking dollar would make US goods more attractive, increasing export demands, creating more US jobs.
2. exerting political influence through currency war would possibly force an important issue into the limelight: how can US protect itself and its policy when a big stake of US assets is controlled by possible hostile nation? Think of this problem as a virus and what US can do to immune itself.
3. Job loss to other countries. Weakening dollar would make off-shore outsourcing less attractive, as labor costs would rise to compensate for the difference.
4. force US to take equally harmful measures by taxing Chinese imports, reducing imports, or switching to other nations for imports of goods. Singapore, Mexico, South American nations, etc.
So, while Chinese move is definitely politicized, we're not without weapons and ideas. Although I do agree, uncontrolled and over long term this could produce some bad news: inflation with possible depression-like conditions.
Of course, if I were president I'd just nullify all chinese bonds and hide in a bunker somewhere :D just for sh!ts and giggles. |
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| emc^2 |
Oh, and this definitely shows how interdepended US is. It is no longer about being a world cop with a big stick. You now have to be very tactile and polite when telling other countries that you're there to make them democratic.
Also, large portion of this nonesense has roots in energy. So, the world is approaching it's next evolution: evolution of energy. If we evolve, we live and become a super human race with abilities to travel outside of our own galaxy. If not, we either destroy each other or die a slow and painful death.
This will be a fun millenium.:clown: |
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| Shakka |
| quote: | Originally posted by Purple
China dosent have free floating currency so it wont effect them at all. But it will definately effect every other country on this planet directly / indirectly.
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They have massive holdings of treasuries. If the price of said treasuries moves one way or another, it certainly affects China.
And they semi-floated their currency (sort of/slightly) back in '05, though the books are very opaque. They certainly have a stake in this. |
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| emc^2 |
Reminds me of a joke:
This chick goes to dentist office. After examination, doctor says he needs to pull her tooth. As he gets in her mouth with plyers, she gets a firm grip on his ba11s and says: "now doc, we're not going to hurt each other, are we?" |
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