Discussion in 'Economy & Infrastructure' started by LETHALFORCE, Apr 12, 2009.
China's FX reserves growth collapses
China's FX reserves growth collapses
China Cuts Purchases of Treasuries and Foreign Bonds
Monday, April 13, 2009
China Cuts Purchases of Treasuries and Foreign Bonds
We've mentioned earlier that it was inevitable that China would reduce its purchases of Treasuries, independent of its desire to diversify away from them. With trade falling (although China still has a high surplus) and hot money inflows reversing direction, China has less reason to buy foreign assets.
From the New York Times:
Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.
China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.
China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.
In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.
Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank....
There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.
Yves here. That is more than a tad misleading. All signs are that consumer savings are debt reduction (the official reports of "savings" merely measures income versus consumption and does not differentiate whether the difference is debt paydown or an increase in liquid assets that could be used for investments such as Treasuries). The picture is further muddied by the clampdown on consumer credit. Money mavens for the masses such as Suze Orman, who formerly advised paying down on credit card debt as quickly as possible, now are telling consumers to build up an 8 month cash reserve and make only minimum card payments, since card companies are often cutting credit lines and not extending new credit. Thus families can no longer rely on credit cards as a source of emergency money and need to look to their own resources. Back to the story:
The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment.
Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese new year holidays here in late January....
Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. In the first quarter, instead of the Chinese government sending money out of the country to buy foreign bonds, Chinese individuals and companies were buying many of the same bonds.
“The outflow would mostly end up in the U.S. anyway,” even if China is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday..
LF sir...The Chinese have walked into a successful US trap. There is no getting out of it till they convert and diversify their reserves. In the end they will be paying the US only. There is no other choice.
Who is playing whom for suckers?
Funnily enough, some US policymakers see this reliance on the Chinese to gather more US debt as detrimental in the long term.
If the Chinese dump the dollar tomorrow, US economy would plummet. While China, as an authoritarian society, may be able to tide over the humaitarian crisis from that. US will not be able to do so.
Obviously China will not do that, at least not now. but in the future, if they manage to have internal consumption sufficiently well developed not to depend on exports only, they will be in a position of screwing the dollar value. Imagine this, China buys a lot of dollars to prop up the RMB. then they sell dollars to get euros to buy infrastructural equicpment from european manufacturers. What happens to the dollar's price vis-a-vis Euro?
I think it is safe to say that both countries would try to get out of coupling. China would like to decrease its exposure, and US would tryo to pay down the debt
There has to be a buyer for all those Dollars China would want to sell in the future.
Who has to capacity to buy all those Dollars? If China tries to sell, then the prices will plummet, then what value will all those Dollars have?
By buying so much US treasury bills and govt bonds and having so much reserves in dollars, china and USA have become very interdependent on each others success. The chinese know they cant win a war against the US. By having so much US dollars in hand, China has some leverage over US economy and as such they know that the USA will think twice before ticking them off.
The biggest problem for china will come if USA plummets into another 1920s depression. The dollar will crash to the point of being almost worthless, and take the chinese foreign reserves with it.
Basically china and USA will either grow together or fall together.
I have to object to this assertion. China can't do squat to America with their treasury bonds that they hold and they don't have any leverage. China has to swallow the humble pie and has to continue to support the American economy one way or the other otherwise they go down. The chinese have too much exposure to American economy that they cannot do anything. They cannot sell their bonds because that will devalue the dollar value and in turn the value of their bonds and loss will be in hundreds of billions for the chinese. That is one of the reason for the recent Chinese brouhaha to replace dollar with a new global currency to decrease their exposure to the dollar.
Pretty much what I am saying. If there is no buyer, the value of the dollar continue to tank. what are the implications opf that for an import based economy such as the US? The crude that they buy becomes very expensive, and they do not have a recourse since their enviromental groups do not allow them to drill offshore. Prices of basic consumer goods increase, because a lot of that is imported. Overall inflation skyrockets, and that isbound to hit the service industry as people would need to spend more for basic goods.
None of that is going to happen till the Chinse figure out to decrease their dependency on the dollar, by boosting internal consumption or whatever. But Us policy makers cannot continue to assume that the Chinese would be willing to mop us US debt indefinitely
currently there is no market for US bonds or treasuries, there is no demand and US government has been buying when possible, for the amount of worthless paper China owns they will never find a buyer (even US govt), US govt can always just flat out refuse to buy back any of the debt and China would be holding worthless paper and there is not much China could do, also USA can place trade barriers so no more dollars go to China and it would be the end of China, USA would go thru an inflationary period but nothing it could not fix in 6-12 months, China in no way controls USA'S 12 trillion dollar economy with all the worthless,non essential mass ,produced junk they send over.
1 corporation is responsible for 75% of Chinese exports-WAL-MART it may be a problem for one corportation and not even make a dent to the rest of the economy.
They can stop buying debt and just hold onto the blank dollars that they bought. Who will fund Obama's stimulus package then?
If they already drank poison how is USA getting them to drink more???
Because if they don't drink this poison today then tomorrow the US economy which is on ventilator collapse and China will die !!! :113:
I know it sound wierd... but thats the way it is...
China will have to continue buying treasuries to support the US economy because if it doesn't the value of the existing bonds collapses (due to no other buyers) and with those falling bonds, the US goes down... if the US goes down, the Chinese sink alongwith them...
So basically the survival of the Us is dependent of the survival instinct's of China
In what way is this not scary for US policymakers, especially in the light of growing intr-Asian trade for China?
It most certainly ought to be... but, for now the US has the clear upper hand...
I don't understand the logic here. US is not completely dependent on China for its survival, if anybody says that, then it is an overstatement. Let's analyze the situation.
US owes to China a certain debt in the form of treasury bonds. Now, if China decides to pull the plug and wants its money back, it has to sell the treasury bonds back to US treasury who in turn have to pay the China in dollars denomination.
So, where does US get that money from?. Simple, it pays back by printing more dollar bills (allegedly, US mint seems to be busy doing just that), which it is already doing for the fiscal stimulus that US govt. has announced. Here is a report for reading
I was trying answer EnlightenedMonk's point that China needs to tsake poison pill etc etc (se above). But you are right, US is not completely beholden to China yet.
BUT, with the new Stimulus Plan they would need to issue more debt. China has already indicated that it would not mop up any more. If it really shies away, then the US could be in a spot of bother. Even if it obliges this time, the US policymakers should take into account that they cannot depend indefinitely on China to absorb US debt.
Therefore the theory that US has led China into some kind of trap is not valid, as the US also has put herself in a risky situation
It is always more dangerous for the debtholder than the debtor, also Japan is also a large US debtholder but they don't act with the arrogance that China does, the Chinese knew the rules of the game when they entered into it , for them to think they can change the rules because they are special in some way is just ignorance on their part.
Arrogance would be more apt...
Well atleast one thing is certain - neither country will do anything to upset the other's economy.
Yes, that is true... but the Americans must do something (and I'm sure they will) to stall the Chinese proposal for an International Reserve Currency... I suspect they plan to use that to decrease the toxic debt that they have....
If that happens then the Chinese can very easily get the upperhand with respect to the US as they slowly and gradually start offloading the Dollars and replacing them with the new reserve...
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