Trade imbalances and the US$

purch

If China loses faith, the Dollar will collapse

From the FT: By Andy Xie

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve's liberal policy of expanding the money supply to prop up America's banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America's problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world's dominant reserve currency. The US can disregard its creditors' concerns for the time being without worrying about a dollar collapse.

The faith of the Chinese in America's power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar's global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar's unique status.

The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country's vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.

http://www.ft.com/cms/s/0/46db5314-390d-11de-8cfe-00144feabdc0.html

setmefree2

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiQPD9_FV_6w&refer=home

Asia’s Export-Led Growth Model ‘Broken,’ Roubini Says

Asia’s export-driven growth model is “broken” and nations in the region need to do more to boost domestic demand, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis. “The old model of export-led growth is broken,” Roubini said in an interview with Bloomberg News yesterday. “Unless policy makers find ways of stimulating consumption and private domestic demand, then the growth recovery is going to be, even over the medium term, weaker than otherwise.”






http://www.atimes.com/atimes/China_Business/KE06Cb01.html

The world melts, China grows

Once China became an oil importer in 1993, its imports doubled every three years. This made it vulnerable to the vagaries of the international oil market and led the government to embed energy security in its foreign policy. It decided to participate in hydrocarbon prospecting and energy production projects abroad as well as in transnational pipeline construction. By now, the diversification of China's foreign sources of oil and gas (and their transportation) has become a cardinal principle of its foreign ministry. Conscious of the volatility of the Middle East, the leading source of oil exports, China has scoured Africa, Australia, and Latin America for petroleum and natural gas deposits, along with other minerals needed for industry and construction. In Africa, it focused on Angola, Congo, Nigeria, and Sudan. By 2004, China's oil imports from these nations were three-fifths those from the Persian Gulf region.

Wookster

Excellent article Purch.

I think all these factors are pointing to trade imbalances starting to unwind.

setmefree2

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html

China fears bond crisis as it slams quantitative easing


"There is a significant shift taking place in China. They are concerned about the stability of the global financial system so they are not going to sell US bonds they already have. But they are still accumulating $40bn of fresh reserves each month, and they are going to be much more careful where they invest it," he said.
Hans Redeker, head of currencies at BNP Paribas, said China is switching into hard assets. "They want to buy production rights to raw materials and gain access to resources such as oil, water, and metals. They know they can't keep buying bonds," he said

Some economists say China is suffering from "cognitive dissonance" by anguishing so much over its reserves, accumulated as a result of its own policy of holding down the yuan to promote exports. Quantitative easing by the US Federal Reserve and fellow central banks may have saved China as well, since the country's growth strategy is built on selling goods to the West.
China's fears of imported inflation may reflect its concerns about over-heating. The M2 money supply rose 25pc in March on a year earlier, and there has been explosive credit growth since the government relaxed loan restraints. There are concerns that the stimulus is leaking into a new asset bubble rather than promoting job growth.

Generali

setmefree2 wrote: »

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html

China fears bond crisis as it slams quantitative easing


"There is a significant shift taking place in China. They are concerned about the stability of the global financial system so they are not going to sell US bonds they already have. But they are still accumulating $40bn of fresh reserves each month, and they are going to be much more careful where they invest it," he said.
Hans Redeker, head of currencies at BNP Paribas, said China is switching into hard assets. "They want to buy production rights to raw materials and gain access to resources such as oil, water, and metals. They know they can't keep buying bonds," he said

Some economists say China is suffering from "cognitive dissonance" by anguishing so much over its reserves, accumulated as a result of its own policy of holding down the yuan to promote exports. Quantitative easing by the US Federal Reserve and fellow central banks may have saved China as well, since the country's growth strategy is built on selling goods to the West.
China's fears of imported inflation may reflect its concerns about over-heating. The M2 money supply rose 25pc in March on a year earlier, and there has been explosive credit growth since the government relaxed loan restraints. There are concerns that the stimulus is leaking into a new asset bubble rather than promoting job growth.

The fear in Australia is that this desire to grab more resources is going to lead China to attack Australia.

There have been (muted) calls for Aus to develop nuclear weapons in response to Chinese rearmament.

Wookster

Generali wrote: »

The fear in Australia is that this desire to grab more resources is going to lead China to attack Australia.

There have been (muted) calls for Aus to develop nuclear weapons in response to Chinese rearmament.

Australia is closer but surely Africa is the better target, with countries like the Congo/ Guinea/ Sudan being in near total chaos. The're much easier targets than Australia.

Generali

Wookster wrote: »

Australia is closer but surely Africa is the better target, with countries like the Congo/ Guinea/ Sudan being in near total chaos. The're much easier targets than Australia.

Very true. Australia has an awful lot of raw materials though.

I guess the fear is that if they nuke a dozen cities then there's not a lot left except the farms and mines.

Wookster

Generali wrote: »

Very true. Australia has an awful lot of raw materials though.

I guess the fear is that if they nuke a dozen cities then there's not a lot left except the farms and mines.

They'd really have to do that, and if they did then I suspect it'd be the start of WW3.

Time for Australia to join NATO eh?

Generali

Wookster wrote: »

They'd really have to do that, and if they did then I suspect it'd be the start of WW3.

Time for Australia to join NATO eh?

Maybe. Who's going to stand up for a wasteland?

Let's face it, it is unlikely that anyone would invade Australia. If China tries then it'd be nasty. That's not the same thing as saying, 'China's going to invade'!

tomterm8

Seriously, why would china even think about trying to sell all its dollar assets? If it were to even think about it, it's main export market would completly close to it.