Trade imbalances and the US$

Generali

setmefree2 wrote: »

If they had spent the money domestically, exports would have fallen and the currency risen. Not with you here - I was talking about the high levels of their gold reserves?

Perhaps I misunderstood what you were saying.

I thought part of your point was that China was spending money on gold rather than on Government provided welfare services (eg health and education). My point is that if accumulated reserves are spent domestically it undermines the Government's policy of keeping the local currency low. If USD is converted to gold then the Govt policy is maintained (for the most part). If it is converted to local currency then the currency will rise in value, possibly quite quickly.

harryhound

If I were running China, I think I would continue with the policy of neo colonialism in Africa and other failing economies. After all with something up to 20% of the world population to support, I would have plenty of muscle & expertise on which to call, and any suggestion of going backwards really could cause unrest.

setmefree2

I "pinched" this link from HPC.co.uk

http://www.investmentpostcards.com/2009/04/30/roubini-global-economics-navigating-towards-bretton-woods-3/

Navigating towards Bretton Woods 3

A few years back, before this crisis erupted, several economists were concerned about the sustainability of the large global imbalances fueled by the so-called Bretton Woods 2 (BW2) system. These economists recognized the tendency of emerging (export-led) economies to manage their exchange rate systems - the origin of large trade and current account surpluses that, via large foreign reserve accumulation, were financing the mirror of those surpluses, namely the large US trade and current account deficits.

Wookster

That is exactly what happened and if there isn't a calm gradual wind down then there will be.a chaotic and disorderly one.

That is the nature of things.

setmefree2 wrote: »

I "pinched" this link from HPC.co.uk

http://www.investmentpostcards.com/2009/04/30/roubini-global-economics-navigating-towards-bretton-woods-3/

Navigating towards Bretton Woods 3

A few years back, before this crisis erupted, several economists were concerned about the sustainability of the large global imbalances fueled by the so-called Bretton Woods 2 (BW2) system. These economists recognized the tendency of emerging (export-led) economies to manage their exchange rate systems - the origin of large trade and current account surpluses that, via large foreign reserve accumulation, were financing the mirror of those surpluses, namely the large US trade and current account deficits.

Wookster

I read this in the Economist recently - its fairly appropriate:

Not quite so SAFE
Apr 23rd 2009
From The Economist print edition

Is China souring on the dollar?

CHINA is America’s largest creditor. Thanks to a policy of piling up foreign-exchange reserves and investing most of them in dollar assets, China’s government bought around one quarter of the net increase in Treasuries over the past two years. But just as Washington needs to sell record amounts of debt to fund its soaring budget deficit and to bail out its banks, there are signs that Beijing’s appetite for American debt may be shrinking.

According to official figures, China’s reserves fell in January and February. Taking the first quarter as a whole they rose by just $8 billion, compared with $154 billion a year earlier. Chinese officials have voiced pointed public worries about the effect of America’s massive fiscal and monetary expansion on the value of China’s dollar holdings. In a high-profile essay, Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), recently floated the idea of a global reserve currency. The combination of falling reserves and rising rhetoric has fuelled fears that China is turning its back on the greenback.


Follow the money
Assessing that risk means answering two basic questions. Is China buying fewer foreign assets? And is it diversifying away from the dollar? Few have delved deeper into the murky world of China’s capital flows than Brad Setser of the Council on Foreign Relations in New York, and his analysis suggests a more complex picture than official statistics portray.

According to the official figures, China’s foreign reserves are $1.95 trillion. But Mr Setser reckons that the true figure is around $2.3 trillion if hidden reserves are included, such as those of the China Investment Corporation (CIC), the country’s sovereign-wealth fund, and the “other foreign assets” of the PBOC. Taking this wider measure of foreign-exchange reserves, and then adjusting for changes in the value of non-dollar reserves caused by swings in the dollar, Mr Setser reckons that China’s total reserves rose by around $40 billion in the first quarter, only one-fifth of their increase in the first quarter of 2008. On the face of it, this represents a big drop in China’s demand for foreign assets.

But official reserves are not the only potential source of Chinese demand for dollars. To see why, look at the country’s balance of payments. China’s current-account surplus is bigger than it was a year ago. That surplus along with a dollop of foreign direct investment gave China a net inflow of foreign exchange of well over $100 billion in the first quarter. If reserves rose by only $40 billion, then something else must account for the other $60 billion. Despite its strict capital controls, China is experiencing a large outflow of speculative private capital, or “hot money” (see top chart, below), largely that of Chinese investors. Just as such “hot money” inflows last year drove China’s reserves up by more than the current-account surplus, so the outflows have now dampened reserve accumulation. But as long as China runs a large current-account surplus, it must, by definition be accumulating foreign assets. What seems to have changed, of late, is who is buying them. The “hot money” leaving China might still buy American Treasuries, or it could buy something else.


What of the idea that China’s government has diversified into other currencies? Here, too, the statistics are hard to make sense of. The State Administration of Foreign Exchange (SAFE), which manages the country’s reserves, does not disclose such details. America’s Treasury reports on foreigners’ investments in American securities, but these figures may understate China’s stash because China buys some dollar assets though non-American intermediaries. For instance Mr Setser and his colleague, Arpana Pandy, estimate that since mid-2006, China has accounted for around 30% of purchases of American Treasuries though London. If these flows are added in to Washington’s figures, China has about $1.5 trillion invested in dollar assets, of which about half are in Treasuries. This is about 70% of China’s total reserves. While that is down from over 80% in 2002, the drop largely reflects the weaker dollar, not a shift into other currencies.

SAFE has spent much of the past few years diversifying the types of dollar assets it holds. During 2007 it bought government-agency debt, ie, that of Fannie Mae and Freddie Mac, rather than Treasuries. In 2007 and 2008 it started to buy equities, just before the market tumbled. In the year to June 2008, China’s holdings of American shares more than tripled to $100 billion. Before the financial markets collapsed last year, SAFE may have had over 15% of its portfolio in equities and corporate bonds, which is high for an official body—and has left it with huge unrealised losses. It is widely thought that SAFE does not mark to market, so official reserve figures conceal the hit. But it is sure to dwarf the more publicised losses from CIC’s investments in Blackstone, a financial firm, and Morgan Stanley, an investment bank.

By many standards China’s reserve portfolio has held up well during the crisis, because most of its reserves are still in long-term bonds which rose in price as interest rates fell; and the dollar so far has been strong. But embarrassing losses on riskier assets have led to a sharp shift in behaviour. Since mid 2008 SAFE has sold government-agency debt and corporate bonds. Its purchases of Treasury bonds have surged (see bottom chart) but of late they have been almost exclusively short-term bills. According to Mr Setser’s figures, over the past three months China’s American assets showed no growth for the first time in many years—despite the modest increase in reserves.

What does this all add up to? China is trying to have it both ways. It wants to lessen its dollar exposure, but it also wants to hold down the yuan. The picture has been temporarily clouded by shifts in “hot capital” flows, but so long as China runs a large current-account surplus, its reserves will rise. In order to keep the yuan weak against the dollar, a large chunk of those reserves will end up in greenbacks. Beijing’s appetite may not match Washington’s growing need for cash. But China cannot sour on the dollar without letting its own currency rise.

setmefree2

http://www.bloomberg.com/apps/news?pid=20601068&sid=aMxl9G63AOUs&refer=economies

China Manufacturing Rebounds on Investment, CLSA Says

"China’s manufacturing expanded for the first time in nine months after declines in export orders moderated and investment surged because of the government’s stimulus package."



http://www.bloomberg.com/apps/news?pid=20601110&sid=asrIE5qecfOQ

"European and U.S. stock-index futures advanced and Asian shares rose as China’s manufacturing expanded and crude oil traded near a five-week high."

"The MSCI Asia Pacific excluding Japan Index climbed 4.5 percent as manufacturing in China expanded for the first time in nine months and regional leaders pledged to start a $120 billion foreign-currency reserve pool. "



http://www.bloomberg.com/apps/news?pid=20601072&sid=aslmPUjYkpiw&refer=energy

Crude Oil Trades Near Five-Week High on Gains in Stock Markets

"Crude oil traded near a five-week high as gains in the stock market increased optimism that the global economy is recovering. Oil rose last week as an improvement in U.S. consumer confidence raised expectations fuel demand will increase. Asian equities climbed today on a report that manufacturing in China, the world’s second-largest crude user, had gained for the first time in nine months."




http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aPYGIrGCjglo

Asia’s $120 Billion Reserve Fund to Boost Confidence

Asian nations will start a $120 billion foreign-currency reserve pool by year-end to help revive investor confidence as economies around the region falter amid the worst global recession since World War II. The Association of Southeast Asian Nations, together with Japan, China and South Korea, will use the funds in times of turmoil. They will set up a surveillance unit that will identify risks to the region and provide oversight of the fund. Japan will contribute $38.4 billion to the pool and offered $60 billion of yen-denominated swap facilities separately to help its Asian neighbors.
“It’s not so much the amounts of money being put in, but the concept of these countries getting together and cooperating,” Mark Mobius, who helps oversee $20 billion in emerging-market assets at Templeton Asset Management Ltd., said in an interview yesterday in Bali, Indonesia. “That’s a very positive development.”
The pool, formed within an existing framework of bilateral currency swaps, widens access to foreign-exchange reserves and will allow nations such as Indonesia and Thailand, recipients of International Monetary Fund bailouts a decade ago, to defend their currencies. The 13 nations have accumulated more than $3.6 trillion of currency reserves since, with China owning more than half of the assets.
“The idea is for the Asean plus three countries to effectively look after ourselves with our own reserves,” Thai Finance Minister Korn Chatikavanij said yesterday in Bali, where the officials met.
$100 Billion Loans
The IMF arranged more than $100 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed during the 1997-98 crisis. In return, governments were forced to cut spending, raise interest rates and sell state- owned companies.
Following yesterday’s agreement, China and Hong Kong together will add another $38.4 billion to the pool, being arranged under a nine-year framework known as the Chiang Mai Initiative. South Korea’s contribution will be $19.2 billion.
The Southeast Asian nations will contribute 20 percent of the total amount. Thailand, Indonesia, Malaysia and Singapore, the four biggest Southeast Asian economies, will contribute $4.77 billion each, and the Philippines will provide $3.68 billion.
Surveillance System
Under the Chiang Mai Initiative, Asian nations can borrow, without restrictions, 20 percent of an agreed swap amount. They can tap the 80 percent balance only after agreeing to IMF-style restrictions.
That may change as the surveillance system is developed, Korn said. The IMF, Asian Development Bank and the Asean secretariat will be tapped initially for their expertise in such matters, finance ministers said.
“We feel that we ought to also develop a surveillance system and manage it ourselves as opposed to needing to rely on the surveillance system of institutions outside the region,” Korn said. “The idea is that as we increase our surveillance capacity, the de-linked portion increases.”
Nine of the region’s 10 currencies tracked by Bloomberg fell against the U.S. dollar in the first three months of the year. This quarter, nine have gained against their U.S. counterpart.
The South Korean won, the Philippine peso and the Indonesian rupiah led gains in Asian currencies today. The won rose 0.7 percent, while the peso climbed 0.6 percent against the U.S. dollar.
‘Real Traction’
“One of the beneficiaries of this crisis, if you want to call it that, has been the way it speeded up the regional market development,” Gerard Lyons, London-based chief economist at Standard Chartered Bank, said in an interview in Bali. “The Chiang Mai Initiative has now started to get real traction.”
Countries such as Japan and China are doing more to help others navigate through the crisis. Japan’s Finance Minister Kaoru Yosano yesterday said the country will offer $60 billion of yen-denominated swap facilities. The facilities for Asian developing nations can supplement IMF programs, Yosano said.
Asia’s biggest economy will also guarantee up to 500 billion yen ($5 billion) of yen-denominated bonds, or Samurai bonds, issued in Japanese markets by developing countries, he said. It will also ease difficulties that some countries may have in issuing bonds, Yosano said.
China last month announced plans to create a $10 billion investment cooperation fund and offer $15 billion in credit to its Southeast Asian neighbors.
“The entire world was hit by the crisis and it can only be addressed through international cooperation,” Yosano said. Cooperation is “the resource we achieved in the meeting.”

setmefree2

Wookster - Thanks for that Economist extract. It's a really good piece imho.

setmefree2

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/04/optimism_about_chinas_economy.html

Optimism about China's economy (Stephanie Flanders blog)

setmefree2

http://www.pridesburg.com/forums/style_emoticons/default/Smiley-LINK-blue.gif

Summers, Geithner Are Silent as IMF Loses Grip: William Pesek

The “Asian Monetary Fund,” so passionately derided by Summers and Geithner at the time, is back. There is little a crisis-plagued U.S. can do to stop Asia’s $120 billion foreign- exchange reserve pool.

harryhound

"wires crossed" in the above link to a news story about the Asians learning about currency in the 1996/97 melt down?