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China inoculates itself against dollar collapse (repost)

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#1 qqqbear


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Posted 17 March 2009 - 06:19 PM

The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.

As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.

As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:

And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.

Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries.

The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.


#2 Bigturtle


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Posted 17 March 2009 - 06:52 PM

IMHO, Chinese government needs to understand that the era of Americans' borrow and spending has ended, regardless how passionate American voters vote or their elected officials do. On the other hand, China does need to watch carfully if Americans will be forced back to work harder and regain their working ethics (such as taking up dirty, noisy, hard works) although the chance is very very very slim. If what just mentioned doesn't happen, Chinese government should think t adjust their economy toward needs of herself and other productive economies. The process is very painful for Chineses altough they cannot elect their president.

To do so, Chinese government needs to let many mal-investments aim for those borrow and spend economies to go bust thus unemployment. It is difficult. A dictator can keep people happy and send pro-West democratic advocatos in jail is to keep economic growth and let wealth to be enjoyd by most. This is a harsh reality and nothing to do if we like it or not. Without bread, German elected Nazi which is totally contradit to what my teacers told me school - sigh, people die fo bread not for democracy. Second, China needs to use its US$ reserve to buy resouces and advanced technolgies from other nations - let USA to use her remaining technologies to exchange for T-bonds and agency bonds. In the process, Yuan will soar and further weakening her export to USA. Chinese government should let this happen (this is a process of write-off, write-off American consmers!). Don't keep watching how much its T-bond worth - just convert it into as many useful assests as possible. Third, they need to support poor Chinese been laid-off while leave current rich ellite to the mercy of market. Today, China's top 20% earns near 10 times of her bottom 20, far higher than Japan (~ 5 times) and her rivalry Taiwan (~ 6 times). If this deteroriate further, Communists may arise to throw away current "Communist" rulers. Forth, they need to relax their lending rules to small businesses to help them to convrt their business from export oriented toward domestic demand oriented. Through lending money to them, they produce and in-turn can spend money themselves on domestic productions. It is economical - producers exchange their production. They need to live through without outside borrow and spender.

#3 mannfm11


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Posted 17 March 2009 - 07:39 PM

the death of the US is greatly exaggerated. China worked a decade to get $2 trillion and Bernanke and Obama just pulled it out of their hat.

#4 shooter


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Posted 18 March 2009 - 02:11 AM

the death of the US is greatly exaggerated. China worked a decade to get $2 trillion and Bernanke and Obama just pulled it out of their hat.


I don't believe that any of the $2T in notes has been placed yet..... so do't call that game yet.

Years ago I posted that China would most likely stop buying treasuries because we stopped exporting them dollars that they would have nothing else to do with. That is the truth of the matter. As the trade imbalance diminishes...China's dollar recycling will diminish. At some point, it will be low enought that they might actually start to consider liquidating accumulated portfolios.

Personally, I think they should have been selling into the UST rally from earlier this year..as quietly as possible.

Don't discount the 'deflation UNTIL' scenario that Janzen envisions. Once China has nothing to lose buy selling UST debt...the game changes.

#5 Grub


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Posted 18 March 2009 - 10:18 AM

China traded its labor for an entirely modern industrial manufacturing infrastructure, educated and experienced workforce, energy infrastructure, etc. They also now have a very large "war chest" to buy any and all assets world wide. Additionally, they hold a trump political sword over any US Presidential administration.

Not bad for a few decades effort, huh?

A modern Uriah Heap.

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