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  1. #151
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    China's Hot Money Problem Returns - WSJ.com

    * The Wall Street Journal

    * HEARD ON THE STREET
    * AUGUST 7, 2009, 1:40 P.M. ET

    China's Hot Money Problem Returns

    By DAVID ROMAN

    Hot money is again flowing into China and that could put Beijing in a quandary.

    Should the torrent continue, it could complicate policymakers' efforts to battle inflation. Should it reverse, property and stock prices will be hit hard.
    [china money]

    There's no easy solution to this, nor does Beijing have much control over the situation. As it is the hot money -- speculative inflows that aren't explained by direct investment or trade -- finds its way around China's tight grip on capital flows.

    Its return became evident when Beijing reported last month that foreign exchange reserves rose $178 billion -- the most ever -- in the second quarter.

    Analysts at UOB Group estimate that as much as $83 billion of this could be hot money -- much of that flowing into stock and property markets and contributing to forming bubbles in both.

    As a comparison, about $200 billion of the $1 trillion lent out by Chinese banks in the first six months of the year is thought to have wound up in stocks. The Shanghai Composite is up 97% so far this year.

    Two factors could keep the funds flowing in: Expectations that Beijing will soon begin to raise interest rates, and a sense that, after being halted for a year, the revaluation of the yuan could resume.
    [The further China moves away from economic crisis, the greater the anticipation that yuan revaluation will continue. ] Bloomberg News/Landov

    Gains in the value of the yuan could be substantial over the long term.

    The yuan's revaluation in particular has always been a motivation for hot money investors, given the potential for gains as China allows the currency to strengthen -- and the very low likelihood that the currency will weaken.

    The further China moves away from economic crisis, the greater the anticipation that yuan revaluation will continue. Traders in currency forwards markets are already betting that it'll take 6.78 yuan to buy a dollar a year from now, down from 6.83 currently.

    Over the long term, gains could be substantial. The Peterson Institute for International Economics says the yuan is undervalued by between 15% and 25%.

    Beijing could discourage the inflows by signaling that it won't live up to these expectations. A change in global sentiment would do the same: As investors retreated around the world in late 2008 and early 2009, some $173 billion of hot money flowed out of China, UOB estimates.

    But in that respect hot money is a double-edged sword, pulling down prices on its way out just as it helps create bubbles on the way in.

    Write to David Roman at david.roman@dowjones.com

  2. #152
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    Yuan Gain ‘No-Brainer’ to Schroder as China Confronts Inflation
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    By Bloomberg News

    Aug. 13 (Bloomberg) -- Global fund managers are betting China will let the yuan strengthen for the first time in more than a year to keep inflation at bay following a flood of foreign capital and record lending.

    Schroder Investment Management Ltd., Western Asset Management Co. and Martin Currie Investment Management Ltd. said they bought contracts in July that pay off if the currency advances more than set amounts. On average, last month’s non- deliverable 12-month forwards will make money next July if the yuan rises more than 0.87 percent, or sooner if that expectation increases. Schroder and Western predict the contracts will reflect expected gains of 5 percent or more by Dec. 31.

    New loans in China almost tripled to $1.1 trillion this year, contributing to a 60 percent surge in property sales. A $585 billion stimulus plan helped July’s retail sales rise 15.2 percent from 2008. Reserves swelled to $2.1 trillion on June 30 after a record quarterly jump as overseas investments led China to sell yuan to hold it down. The Shanghai Composite Index, Asia’s second-best performer this year with a gain of 71 percent, is in “bubble territory,” Shenyin & Wanguo Securities Co. says.

    “They’ve got to slow down at some point,” said Warren Hyland, a money manager in London for Schroder, which oversees $210 billion. “The forwards have to price in some appreciation. To me, it’s a no-brainer.”

    Forwards reflect market expectations because they let traders buy and sell assets at a set price for delivery at a specified date. Non-deliverable contracts are settled in dollars based on the asset’s value at maturity.

    Gaining Popularity

    Yuan non-deliverable forwards have become more popular since the government stopped pegging the currency to the dollar in July 2005. Average daily turnover climbed to $1 billion last year, from $50 million in 2004, according to Deutsche Bank AG estimates cited by the Asian Development Bank.

    The contracts predicted late yesterday the yuan would be valued at 6.8150 per dollar in 12 months, a 0.3 percent advance from the 6.8351 spot rate in Shanghai. The contracts have projected average gains of 3.9 percent since the peg was scrapped and the currency rose 21 percent in that time.

    Ken Peng, a Beijing-based economist at Citigroup Inc., recommends buying one-year forwards. He predicted yuan gains will resume in the fourth quarter, with the currency climbing 1.7 percent to 6.72 per dollar by mid-2010 and 3.6 percent to 6.60 by the end of that year. Median forecasts of analysts surveyed by Bloomberg foresee gains of 1.9 percent and 2.6 percent, respectively.

    Limited Appeal

    The predicted increases pale alongside six-month rallies of 18 percent and 14 percent for the Indonesian rupiah and the Korean won, respectively. Median Bloomberg survey forecasts for mid-2010 on those two currencies -- 2.1 percent and 5.6 percent -- also outpace the yuan predictions.

    “Over a one-year period the yuan will certainly appreciate more than 1 or 2 percent, but we don’t think it will appreciate as much as other Asian currencies,” said Ivan Leung, a Hong Kong-based chief investment strategist at JPMorgan Private Bank, which manages $400 billion. “You can make some money out of the non-deliverable forward, but it’s not that much.”

    The People’s Bank of China on Aug. 5 reiterated its goal of keeping the yuan stable at a “reasonable and balanced” level even as it pledged to increase exchange-rate flexibility.

    The currency is allowed to fluctuate by 0.5 percent a day on either side of a reference rate set by the central bank daily. That rate has barely moved against the dollar since July 2008 as policy makers kept appreciation in check to help exporters weather the first global recession since World War II by keeping down their goods’ overseas prices.

    ‘Substantially Undervalued’

    Exports fell 23 percent in July from a year ago, helping narrow the monthly trade surplus to $10.6 billion, from a record $40.1 billion in November, government data show.

    The International Monetary Fund has determined China’s yuan is “substantially undervalued” and an obstacle to improving the world’s fastest-growing major economy, Nigel Chalk, head of the lender’s Asia-Pacific division, said July 23.

    A stronger yuan would help fend off rising consumer prices by reducing costs for imported raw materials. The Reuters/Jefferies CRB Index of 19 commodities has risen 15 percent this year, and the central bank warned on July 28 that “imported inflation” pressure may build.

    Hong Kong Bets

    Speculation that China will allow yuan appreciation has helped prompt Hong Kong residents to buy more of the currency. Yuan-denominated deposits in the city, where purchases are limited to 20,000 yuan ($2,926) a day, increased by 932 million to 54.4 billion in June, the biggest rise in more than a year.

    “If you live in Hong Kong, convert 20,000 every day; it’s a slow way to get rich,” said Jim Rogers, chairman of Rogers Holdings, in an interview last week in Singapore. He said he buys yuan “whenever I get the chance.”

    Policy makers allowed the yuan to rise in 2008’s first half, producing a 7.1 percent gain for the year, the biggest since 2005, as consumer prices climbed 5.9 percent, the fastest in more than a decade. China International Capital Corp., a Beijing-based investment bank, predicts prices will increase 5 percent in 2010 after falling 1.8 percent from a year earlier in July.

    As the central bank works to keep the currency from rising, it tries to curb inflation by selling debt to sop up the additional yuan it pours into the economy. The broadest money supply measure, known as M2, rose 28.5 percent from a year earlier in June and 28.4 percent in July, the biggest increases since at least 1999, data compiled by Bloomberg show.

    Costly Intervention

    The government resumed sales of one-year bills July 9 after an eight-month suspension. Selling debt to control inflation has become a money-losing exercise as the U.S. government bonds that make up the largest share of China’s reserves pay less interest than the central bank spends on its debt. Three-month Treasuries yesterday yielded 0.17 percent, or 1.23 percentage points less than same-maturity Chinese notes.

    The sums involved also are growing. An estimated $60 billion of speculative investments flowed into China in the second quarter, and currency reserves will swell to more than $2.5 trillion this year as policy makers continue selling yuan to control it, Citigroup’s Peng predicted. China’s holdings of U.S. Treasuries totaled $801.5 billion at the end of May, up 58 percent from a year earlier.

    “Cost will ultimately count,” said Rajeev De Mello, the Singapore-based head of Asia bonds at Western Asset, which manages about $430 billion. “That’s why over the period of a year, China will let the currency appreciate again.”

    Higher Rates

    Chris Ruffle, who helps oversee $3.5 billion as co-chairman of Martin Currie’s China unit in Shanghai, said the resumption of inflation by the end of 2009 probably will prompt China to raise interest rates, intensifying pressure for the yuan to strengthen as higher returns encourage investors to pump more money into the country. China’s benchmark one-year deposit rate is 2.25 percent, compared to the U.S. equivalent’s 1.46 percent.

    “The central bank will have to work a lot harder if it wants to keep the currency pegged,” he said. “By that time, exports will probably have stabilized and domestic consumption will be OK, so they will feel more comfortable to allow the currency to increase a little bit.”

    --Judy Chen and Ye Xie. Editors: James Regan, Phil Kuntz

    To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or Xchen45@bloomberg.net; Ye Xie in New York at +1-212-617-2768 or yxie6@bloomberg.net.
    Last Updated: August 12, 2009 21:22 EDT
    Yuan Gain ?No-Brainer? to Schroder as China Confronts Inflation - Bloomberg.com

  3. #153
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    LOL

    UltraShort FTSE/Xinhua China25 Proshares (FXP) gain over 10% today, alot people is losing alot of RMB (and their shirt).

    that is what happens when people pump billions and billions of hot money to a casino.

  4. #154
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    China bought $24.1 bln in US T-bonds in July -paper


    SHANGHAI, Sept 17 (Reuters) - China snapped up $24.1 billion worth of U.S. treasury bonds in July, pushing its total holdings to $800.5 billion by the end of that month, the China Securities Journal on reported Thursday, quoting a U.S. announcement.

    China is the single-biggest holder of U.S. government debt -- it held $768 billion in Treasuries as of March -- and has watched uneasily as Washington has spent lavishly to try to haul the U.S. economy out of its deepest recession in 80 years. (Reporting by Melanie Lee; Editing by Jonathan Hopfner)

  5. #155
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    While the dollar has reached such a low level, PM Wen keeps quiet.

    anyways.


    * OCTOBER 14, 2009, 7:21 A.M. ET
    Rise in China's Forex Reserves Highlights Continued Flow of Capital - WSJ.com
    Rise in China's Forex Reserves Highlights Continued Flow of Capital

    By ANDREW BATSON

    BEIJING – China's already-massive reserves of foreign exchange continued to swell during the third quarter, figures published by the central bank show, an indication that outside money is still flowing into an economy that rebounded quickly from the global crisis.

    The People's Bank of China said Wednesday that its foreign-exchange reserves, which were already by far the world's largest, reached $2.273 trillion at the end of September, up from $2.132 trillion at the end of June. China's central bank adds to the reserves when it buys up foreign currency coming into the country – either as export earnings or investment flows – in exchange for the local currency, the yuan. Since China reliably runs a trade surplus and also keeps its currency largely fixed against the U.S. dollar, the reserves have grown steadily.

    View Full Image
    China economy



    Yet the $141 billion increase in reserves in the third quarter was substantially larger than China's trade surplus for the quarter of $39.27 billion. Such a gap is usually taken as an indication that money is also coming in from other sources. And it follows an even larger surge of $177.87 billion in the reserves in the second quarter, which came as investor confidence in China returned and signs of capital flight in earlier months reversed.

    China's trade surplus has shrunk this year, as its exports were depressed by the collapse in global demand but imports recovered more quickly on the back of the government's stimulus program. Separate data issued Wednesday showed the monthly trade surplus for September narrowing to $12.93 billion from $15.71 billion in August. Exports were down 15.2% from a year earlier but the decline in imports narrowed to just 3.5%. The smaller trade surplus, if it is sustained, would tend to slow how fast the foreign-exchange reserves accumulate.

    There are plenty of reasons for the shifting of funds into China by investors or companies indicated by Wednesday's reserves data. The Shanghai stock market, though off its highs earlier this year, is still one of the best-performing in the world, and Chinese property prices have been rising for several months. One indicator of retail-investor interest in Chinese assets – the amount of Chinese currency held by Hong Kong residents – is also posting gains. Figures from the Hong Kong Monetary Authority show yuan deposits in the territory rising every month since May, after a long string of declines.

    The large increase in China's reserves means it still has to find somewhere to put tens of billions of dollars in foreign currency every month. U.S. Treasury debt has been the default option. Chinese officials have this year publicly worried about what U.S. fiscal and monetary policies might do to their holdings. But those statements haven't been matched by a major change in China's actual investment strategy, mostly because there are few safe investment alternatives to U.S. Treasury bonds. The most recent figures from the U.S. Treasury show China buying a net $15.26 billion in long-term bonds in July, after buying $26.63 billion in June.

    View Full Image

    The boost in the currency reserves is also helping keep money loose in China. The central bank figures also showed the M2 measure of money supply up 29.3% from a year earlier in September. New local-currency lending totaled 516.7 billion yuan in September, up from 410.4 billion in August and 34.2% higher than a year earlier.

    The headline value of the reserves was probably also boosted by the recent fall in the U.S. dollar against major currencies like the euro. That would have boosted the dollar value of securities China holds in other currencies. Because of the sheer size of China's holdings, shifts in currencies can easily cause moves of tens of billions in the reported value of the reserves.

    Write to Andrew Batson at andrew.batson@wsj.com
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    Bill Gross: Major China Bubble Emerging

    The investment guru who runs the world’s biggest bond fund at Pimco, Bill Gross, says a speculative bubble is emerging in China.

    Real economic growth there is still constrained by limited consumer demand from the United States and other trading partners

    Gross told Bloomberg News that the Chinese will have “a bubble of their own” to confront shortly.

    “It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China.”

    Constrained growth potential in the United States will be the “new normal” for a while, Gross contends.

    “With U.S. unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,” Gross says.

    China’s trade surplus with the United States nearly doubled in October from the previous month to $24 billion, figures from the Customs Bureau show.

    The Shanghai Composite Index of shares has returned 84 percent so far this year. The index is valued at 35 times reported earnings, more than doubling in a year.

    This is unsustainable, notes Gross.

    The “systemic risk” of another asset bubble is rising, in part because the Federal Reserve has kept interest rates at record lows.

    What’s more, there are other, potentially difficult developments.

    “China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland,” Gross adds.

    Bloomberg News also reports that China's government has encouraged a $1.3 trillion credit boom this year to complement its monetary and fiscal stimulus, which is raising concern internationally about future economic instability there.

    The Organization for Economic Cooperation and Development (OECD) also is raising red flags about the burgeoning Chinese bubble.

    Bill Gross: Major China Bubble Emerging

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    Barton Biggs of Traxis Partners disagrees with the notion of a China Bubble on tonight's Charlie Rose. But I am taking no chances and dump my China related ETF last week (this is not an investment tip)

    I am not seeing a system failure anytime soon, just hoping for a correction.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  8. #158

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    Quote Originally Posted by Julie View Post
    The investment guru who runs the world’s biggest bond fund at Pimco, Bill Gross, says a speculative bubble is emerging in China.

    Real economic growth there is still constrained by limited consumer demand from the United States and other trading partners

    Gross told Bloomberg News that the Chinese will have “a bubble of their own” to confront shortly.

    “It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China.”

    Constrained growth potential in the United States will be the “new normal” for a while, Gross contends.

    “With U.S. unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,” Gross says.

    China’s trade surplus with the United States nearly doubled in October from the previous month to $24 billion, figures from the Customs Bureau show.

    The Shanghai Composite Index of shares has returned 84 percent so far this year. The index is valued at 35 times reported earnings, more than doubling in a year.

    This is unsustainable, notes Gross.

    The “systemic risk” of another asset bubble is rising, in part because the Federal Reserve has kept interest rates at record lows.

    What’s more, there are other, potentially difficult developments.

    “China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland,” Gross adds.

    Bloomberg News also reports that China's government has encouraged a $1.3 trillion credit boom this year to complement its monetary and fiscal stimulus, which is raising concern internationally about future economic instability there.

    The Organization for Economic Cooperation and Development (OECD) also is raising red flags about the burgeoning Chinese bubble.

    Bill Gross: Major China Bubble Emerging
    I'm not sure I agree with this entire theory. If anything, this downturn has shown that Chinese exporters are becoming even more competitive and not really gaining market share in a lot of areas like solar panels, wind turbines and such. They are actually using this downturn to buy foreign companies at dirt cheap prices. I'm not saying that's always a good idea, but it does allow you to move up the value chain. And of course, the domestic market has really boomed this year. The domestic consumption and gov't spending are what's causing the increasing GDP. Trade balance is actually a negative factor to GDP increase this year.

    Pimco should spend more time looking at US gov't and get its business model away from investing in fixed income assets and into things that are not going to be destroyed by this upcoming currency crisis. I for one have moved away any money i had left with pimco in my 401k.

    Having said that, the Chinese stock market is probably due for a correction in the future, but that doesn't mean the economy is collapsing. For some reason, people think stock market going up means economy is getting better and going down means economy is receding. I guess they haven't noticed that the increased value of S&P hasn't brought any real jobs.

  9. #159
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    Sprott Calls The Fed "A Ponzi Scheme" As Half A Trillion In Treasury Purchasers Are Unaccounted For | zero hedge

    Love the comments. "Trashuries" is my new word of the day.

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    Take my money, please???
    Qu Hongbin, chief China economist for HSBC, said part of the reason for the increase in lending by Chinese banks overseas is that the global financial crisis showed that China needs to diversify its holdings. Much of China's $2.3 trillion in foreign reserves remain invested in U.S. Treasurys, but Chinese leaders have repeatedly expressed worry about the value of their U.S.-dollar denominated holdings as the U.S. economy faltered.
    Chinese banks find their credit in high demand
    Chinese banks find their credit in high demand

    By Ariana Eunjung Cha
    Washington Post Foreign Service
    Saturday, January 2, 2010; A01

    BEIJING -- China's state-owned banks have become a main engine of the global recovery, financing the construction of copper mines, purchase of airplanes, expansion of retail stores and other projects even as their U.S. and European counterparts scale back lending.

    The surge in Chinese lending, triple the 2008 rate, has provided a lifeline to international corporations during the worst recession in decades, and it reflects a diversification in China's global economic role beyond its holdings of vast amounts of U.S. government debt.

    Over the first nine months of 2009, new lending by Chinese banks has injected $1.3 trillion into the world economy, according to statistics from the People's Bank of China, which functions as China's central bank. The beneficiaries have included U.S.-based Southwest Airlines, the Netherlands' Aercap airplane leasing company, Civil Aviation Authority in Dubai, and Foster's brewery and Woolworths supermarket chain in Australia.

    China's banks have been signing so many new loan contracts so quickly that the country's banking regulatory commission recently warned them to avoid the "blind" pursuit of size lest they run into the same troubles as their Western counterparts.

    The bulk of loans from Chinese banks are staying in the country, and the central bank has not released an official breakdown between foreign and domestic loans. But bank analysts who have reviewed the public data estimate that the amount going to overseas companies has doubled in the past year to represent roughly 11 percent of all new loans, a shift that would appear to reflect an effort by China to diversify its holdings beyond U.S. Treasurys.

    As recently as five years ago, China's big state-owned banks were seen as old-fashioned, bureaucratic behemoths that could barely handle personal checking accounts, much less the complexities of international financing. But by the time the financial crisis hit in 2008, they were in a strong position, thanks to management shake-ups and an injection of capital from the Chinese government that helped them get rid of their nonperforming loans.

    The biggest of the state-owned banks, the Industrial and Commercial Bank of China, is now the world's largest by market capitalization (although that status changes day to day) and the most profitable.

    As of October 2009, Chinese banks held $5.8 trillion in outstanding loans, outpacing Japan, according to the International Monetary Fund. That figure reflected a 22 percent increase over the first 10 months of the year, a period in which outstanding loans held by U.S. banks shrank by 7 percent, to $6.7 trillion, and loans held by European banks stayed flat, with little in the way of new lending.
    Loans as stimulus

    The bank loans are a key part of China's $586 billion stimulus package, often nicknamed the country's "New Deal." While the stimulus is largely directed at domestic infrastructure projects like highways and bridges, it is also helping inject large amounts of liquidity in other countries around the world. According to an analysis by Bloomberg, seven Chinese banks made syndicated loans overseas in the first 10 months of 2009 as compared with three in the first 10 months of 2008.

    "China's banking industry is operating well, without being affected by the crisis. In contrast, the banks in the West lost a lot, and therefore their capacity to make loans was influenced and became lower," said Guo Tianyong, director of the Chinese Banking Research Center at the Central University of Finance and Economics in Beijing.

    With Citibank, HSBC and other traditional lending institutions sidelined by their own internal problems, Chinese banks jumped in and took their place in a number of important transactions.

    "In the past year, Chinese banks made many top headline deals. In good times, such deals would not have fallen into the hands of Chinese banks," said Fan Bing, chief China representative of South Africa's Standard Bank Group, which signed a $1 billion loan deal with four Chinese banks in September.

    In interviews, officials of several companies that received loans from Chinese banks said that they received much more than they sought.

    Things looked bleak when Peter Fredricson's energy company in Australia was looking to refinance its loans this year. Most U.S. and European banks it had worked with had either reduced their lending or pulled out of the country altogether.

    Then a new financier -- Bank of China -- showed up, with a representative explaining that the bank was expanding its operations in Sydney and seeking new opportunities.

    Fredricson, chief financial officer for the APA Group, asked whether the bank would consider a $90 million loan. It wasn't long before the Chinese responded: How about $110 million?
    Appetite for risk

    Similarly, there was so much interest from Chinese and other Asian banks that when Dutch commodity trading company Trafigura sought $505 million in revolving credit in November, it ended up receiving $700 million.

    The lenders included the Agricultural Bank of China, the Industrial and Commercial Bank of China and Minsheng Bank. Pierre Lorinet, Trafigura's chief financial officer, called the commitments from China "groundbreaking." He said that during his efforts to raise funds this year he found a striking difference in the sentiment of European banks versus Chinese and other Asian banks: "There's more appetite for credit risk in Asia."

    Klaus Heinemann, chief executive of Aercap, which is based in Amsterdam, also said a Chinese lender approached his company offering assistance. While Heinemann said that Aercap was not having trouble securing loans, it seemed smart to work with a lender in the world's fastest-growing major economy. Aercap ended up taking $1.7 billion from China Development Bank.

    "It's the first time for us to take money from a Chinese bank," Heinemann said.

    Qu Hongbin, chief China economist for HSBC, said part of the reason for the increase in lending by Chinese banks overseas is that the global financial crisis showed that China needs to diversify its holdings. Much of China's $2.3 trillion in foreign reserves remain invested in U.S. Treasurys, but Chinese leaders have repeatedly expressed worry about the value of their U.S.-dollar denominated holdings as the U.S. economy faltered.

    These days economists say China would do well to move its foreign reserves into anything but U.S. government-backed holdings. "As the amount of dollars flowing in from trade continues to increase each year," Qu said, "the need for the dollars to be recycled out of China grows with it."

    Researcher Zhang Jie contributed to this report.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  11. #161
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    If China wanted to do something about it's reserves it could just free float it's currency

    -ED COLUMNIST
    Chinese New Year

    By PAUL KRUGMAN
    It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way.

    Actually, the biggest problems with China involve climate change. But today I want to focus on currency policy.

    China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.

    Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.

    Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves.

    This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us?

    In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to go. Short-term interest rates are close to zero; long-term interest rates are higher, but only because investors expect the zero-rate policy to end some day. China’s bond purchases make little or no difference.

    Meanwhile, that trade surplus drains much-needed demand away from a depressed world economy. My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.

    The Chinese refuse to acknowledge the problem. Recently Wen Jiabao, the prime minister, dismissed foreign complaints: “On one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” Indeed: other countries are taking (modest) protectionist measures precisely because China refuses to let its currency rise. And more such measures are entirely appropriate.

    Or are they? I usually hear two reasons for not confronting China over its policies. Neither holds water.

    First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage.

    Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.

    Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

    Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

    The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.

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