Profitsee – Future Economic Surivival

Divinations in Forex, Commodities and Economic Patterns

China – From sester’s RGE blog

I’ve been working on my networking technology degree in lieu of concentrating on Binaries for the past 6 months. However, I’m still fascinated with how risk is managed in today’s world: in particular the effect of China’s vast holdings of US debt to about 1 trillion US. The following comment is from Brad Sester from his blog, on this issue:

“gillies — i actually disagree with what we all agree on (that china shoots itself in the pocket book if it starts to sell dollars) … since i argued (note the post above) that china shoots itself in the pocketbook every time it adds a dollar to its portfolio. sure, ending the status quo (and the status quo is dollar buying, not holding on to china’s existing $) means taking losses — but china would face far smaller financial losses by changing policy now than by changing policy later, when it has far more dollars. where china hurts is on the export side.  
of course, everybody may be right and i may be wrong, but i have a lot of convinction on this one: to avoid losses now, china has to add to its future losses. 
curious guest: China may have hedged v move sin eur/$ — i.e. it coudl have swappped some of on balance sheet $ for euros through an off balance sheet transaction. my guess tho is that china couldn’t do this in a big way without the market getting wind of it, and if it did it in a big way, it would move the eur/$ market (someone else has to take the $ for China to get rid of it). macroman is alas on vacation, but he would have a better sense of this than me. 
the main risk that china is taking tho is not the risk that the $ tanks v the eur, but rather that the RMB appreciates against both the EUR and the USD. and china cannot hedge that risk away — no one else wants to hold $ when they can hold RMB, which is why the PBoC is building up its dollars in the first place. basically, that risk is an unhedgeable risk — and it is a risk the pboc has to take so long as it wants to keep the rmb stable v the $ in the face of market pressure for appreciation. 
guest with a banker friend who doesn’t like stupid blogs …  
well, on this issue at least, i think i am reasonably credible — i used to work at the US treasury, i testify before congressional commitees, and the like. I have my point of view, of course, but i hope I rise above the average level of a “Stupid blog” from time to time. Your banker friend is right in the sense that china’s dollars ultimately have to be spent on us goods (or traded for something else), tho i guess they also coudl be sold to domestic chinese investors who want to buy US assets (if such demand materialized; right now, chinese savers prefer to keep their funds at home). He also is right that the growth in china’s dollar reserves is fueling rapid money and lending growth in china, tho china could achieve the same thing by “monetizing” domestic Chinese bonds without taking on the $ risk it now is taking on. Your banker friend should understand that — basically, a central bank can print cash against either domestic bonds (what the US does) or foreign assets (what china does) and if you print cash against assets denominated in your own currency, you have less currency risk. I think your banker friend misses one key point though: to keep the game going, china has to not just hold on to its existing dollars, but to buy every more dollars to provide the US with the ongoing financing needed to cover the uninted states cash flow deficit. the scale of financing that china is providing to the us is rising strongly over time as well — so the real question is whether china will continue to do so indefinately, and then what happens when china becomes a bit less willing to make up for a shortfall in market financing for the us deficit. part of the answer is that china itself will take losses. but part of the answer is that the us economy also would need to adjust — i personally think we would be better off if that adjustment started sooner not later. 
in any case, the views of your banker friend are fairly common. my view is more of a minority view. but it isn’t that far — i suspect — from the views of Dr. Summers, so it isn’t an entirely crazy minority view. you might want to print out Summers’ per jackobsen lecture (i am sure i misspelled the lecture name)and give it to your banker friend — it discusses these very issues (it is the second link in the blog).”


Filed under: Research,

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