Thread: China "worried" about US Treasury holdings

Obama Meets Hu as Stimulus Plans May Heat Up U.S.-China Clashes
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http://www.bloomberg.com/apps/news?p...8g0&refer=asia


By Michael Forsythe and Kevin Hamlin

April 1 (Bloomberg) -- Presidents Barack Obama and Hu Jintao meet for the first time today to discuss a global economic crisis each is trying to combat with policies that may further complicate U.S.-China relations.

As they meet ahead of a gathering in London with other leaders from the Group of 20 advanced and emerging economies, the two presidents are directing a combined $1.4 trillion of stimulus spending.

While their efforts will soften the impact of the global recession, analysts say U.S. spending to stimulate demand and China’s focus on investment in public works are likely to exacerbate the global imbalances that inflated asset bubbles and brought on the collapse of credit that helped trigger the current crisis.

The two countries remain locked in “an unhealthy embrace,” said Charles Freeman, a U.S. trade negotiator who is now at the Center for Strategic and International Studies in Washington. “How we ease that embrace so we can stay embraced but not choke ourselves to death in the process is going to be a serious thing that we deal with in the next decade.”

Obama’s $787 billion stimulus package runs up budget deficits to be financed by more Chinese purchases of U.S. debt. Such a prospect leaves Chinese Premier Wen Jiabao “worried” about the safety of China’s $740 billion holdings of U.S. Treasury securities, the world’s largest, he said March 13.

China’s Stimulus

Meanwhile, Hu’s 4 trillion yuan ($585.4 billion) stimulus plan doesn’t help build the domestic consumer demand that China needs to support its own industries and reduce its reliance on exports, says Ha Jiming, chief economist at China International Capital Corp. in Beijing.

The plan will “delay a rebalancing toward greater consumption-driven growth because about 75 percent of its spending is for infrastructure,” Ha says.

Unless the two countries break a cycle that requires China to continue lending so the U.S. can keep spending, “we’re headed to another major crisis, and it could be worse than this one,” Stephen Roach, Morgan Stanley’s Asia chairman in Hong Kong, said in an interview.

Obama administration officials say that, with the global economy forecast to shrink in 2009 for the first time in more than 60 years, this isn’t the time to address such issues.

More Demand

“The old global-imbalances agenda was more demand in China, less demand in America,” Lawrence Summers, director of Obama’s National Economic Council, said in a Financial Times interview published March 8. “Nobody thinks that is the right agenda now. There’s no place that should be reducing its contribution to global demand right now.”

Roach and Ha say China’s investment in public works needs to be accompanied by a bigger boost in spending on social security and health care. That might free up private savings for more domestic consumer spending, which could increasingly replace exports as a source of growth.

Roach called China’s three-year, 850 billion-yuan plan to expand health-care coverage “peanuts,” averaging less than $100 for each of China’s 1.3 billion people.

China could also expand its social security fund. At the end of last year the fund had 562.5 billion yuan, or about $63 per person.

“I’ve been quite disappointed that they haven’t done anything particularly aggressive on welfare,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “They have the fiscal resources to do this. This would wipe out a great deal of the U.S.-China imbalances at a stroke.”

‘Superior System’

Zhou Xiaochuan, governor of China’s central bank, said in a March 26 speech that his government’s “prompt, decisive and effective policy measures” are already showing results, demonstrating China’s “superior system.”

He said China’s stimulus program is designed to boost domestic demand through interest rate cuts and spending in areas such as energy conservation and welfare, as well as infrastructure and industrial retooling.

Consumer spending represents more than two-thirds of the U.S. economy versus slightly more than 35 percent of China’s, down from a 45 percent share a decade ago. In contrast, China’s investment as a percentage of GDP has been rising since 2001 and now stands at 43 percent, higher than earlier historical peaks in Japan in the 1970s and South Korea in 1997, according to Ha.

Openness to Change

China may signal openness to change at tomorrow’s G-20 summit. Hu will push global leaders to work together more closely to ensure that “macroeconomic policy is more balanced, proactive, coordinated and counter-cyclical with a view to promoting global economic recovery,” according to a Chinese position paper prepared for the summit.

That’s not enough, according to Roach, who said he told Chinese Premier Wen on March 23 that his government is still relying too much on exports and U.S. consumers to fuel growth.

“What I told him is that that is a big risk,” Roach said. “The U.S. consumer is down for the count for a number of years and so the old formula which has served China extremely well for a long time is not going to be that helpful.”

For Related News and Information:

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Michael Forsythe in Washington at mforsythe@bloomberg.net.
Last Updated: March 31, 2009 12:14 EDT

Originally Posted by Inst

PPP is occasionally used as an estimation of future currency valuation. I don't disagree that at this stage in China's development, revaluing the RMB would be dangerous and detrimental to growth, but in the future when China produces more profitable goods, RMB revaluation would be advantageous.

By the way, according the Anderson's estimation of Chinese exports, only 33% of the cost of Chinese products, on export, is made out of Chinese labor. The rest comes from imports.

PPP is not worthless. How useful it is depends on a country's share of external trade as a percentage of its GDP. It is definitely useful from the POV of the citizens of the country in question, as it gives an indication of their quality of life.

I pay $2.5 for 10lbs of russet potatoes (the cheapo stuff) at Fredmeyers, which works out to around Rs. 27, in Indian Rupees. In India I pay around Rs. 10 for the highest quality potatoes.

There is a lot of difference in terms of daily living

Latest from Krugman from NYT, he is also on the cover of Newsweek. He is stilling singing the same song about not enough.



Op-Ed Columnist
China’s Dollar Trap


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By PAUL KRUGMAN
Published: April 2, 2009

Back in the early stages of the financial crisis, wags joked that our trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.
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Fred R. Conrad/The New York Times

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But these days, both sides of that deal are breaking down. On one side, the world’s appetite for Chinese goods has fallen off sharply. China’s exports have plunged in recent months and are now down 26 percent from a year ago. On the other side, the Chinese are evidently getting anxious about those securities.

But China still seems to have unrealistic expectations. And that’s a problem for all of us.

The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.

Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets.

Now the joke about fraudulent securities was actually unfair. Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets, with U.S. Treasury bills — T-bills, for short — making up a large part of the total. But while T-bills are as safe from default as anything on the planet, they yield a very low rate of return.

Was there a deep strategy behind this vast accumulation of low-yielding assets? Probably not. China acquired its $2 trillion stash — turning the People’s Republic into the T-bills Republic — the same way Britain acquired its empire: in a fit of absence of mind.

And just the other day, it seems, China’s leaders woke up and realized that they had a problem.

The low yield doesn’t seem to bother them much, even now. But they are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts.

But there’s both less and more here than meets the eye. S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds. And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

Does anyone know if Hu Xiaolian got his wish for the IMF to do a bond issue?

I do not believe so.




* APRIL 3, 2009, 1:24 P.M. ET

FOCUS: China's New Intl Assertiveness Pays Off At G20

* Article


By Terence Poon
Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--China's assertive stance in the run-up to the Group of 20 nations summit has paid off.

In the two weeks before Thursday's G20 meeting, Beijing called for developing nations to have a bigger say in world financial institutions, for the International Monetary Fund to step up its surveillance of advanced economies, and for reform of the global financial system.

The forthright expression of its views - in essays from the central bank governor, a press briefing and an opinion piece by a vice-premier - was unusual. With other countries in the BRIC group - Brazil, Russia, India and China - Beijing has used its assertiveness to shape the G20 agenda, helping BRIC achieve many of its goals.

"There are some huge wins for China in this agreement," Standard Chartered Bank economist Stephen Green said after the summit ended. "Now, more than ever, wins for the global economy are wins for China, and their mutual dependence has never been clearer."

The G20 statement supports even-handed IMF economic surveillance, calls for merit-based appointments of IMF and World Bank heads, and pledges to hasten reforms to make both agencies more representative. BRIC finance ministers had called for these changes at their March meeting in London.

Besides the push to improve financial regulation and accelerate IMF governance reforms, the G20's plan to inject more than $1 trillion into the world economy through the IMF and trade finance programs will probably help stabilize demand for Chinese exports, said Green.

Analysts say Beijing has grown more assertive because its economy is increasingly affected by policies elsewhere, and also because it sees the financial crisis as a chance for small steps toward a bigger international role.

Beijing is concerned trade barriers, such a half-year ban on Chinese toy exports to India, will hurt its exporters and workers just as global trade is shrinking.

As the biggest creditor nation to the U.S., it is also worried the U.S. efforts to revive the economy by widening the fiscal deficit and pumping liquidity into the financial system could eventually fuel U.S. inflation.

That would erode the value of China's dollar assets and add to domestic price pressures. Chinese President Hu Jintao Thursday urged G20 leaders to "improve the mechanisms for controlling the issuance of reserve currencies" and the IMF to strengthen supervision of reserve-currency nations, especially their currency-issuance policies.

To be sure, Beijing's newfound assertiveness may still lead to friction with the U.S. and Europe, but analysts say Beijing is likely to keep a measured tone.

During the London summit, for example, the Chinese and French went back and forth on tax havens, but they reached agreement when U.S. President Barack Obama suggested compromise language acceptable to both sides.

Nicholas Consonery, an analyst at political risk consultancy Eurasia Group, cites Beijing's move on tax havens as "a sign of willingness to compromise."

-By Terence Poon, Dow Jones Newswires; 8610 6588 5848; terence.poon@dowjones.com

Originally Posted by xinhui

I do not believe so.

Yeah, I've tried finding stuff on it and can't. I'm just curious as to the nature of the Chinese injection of funds into the IMF.

Originally Posted by Inst

There's one thing that amuses me. In the long-run, RMB revaluation will be to the fair detriment of the Western countries. PPP-wise, China's GDP is about 7.8 trillion as of 2008, while its nominal GDP is 4.4 trillion. Coincidentally, its currency is undervalued by say, the Big Mac Index used informally by the Economist, by a corresponding 40%. Currently, on a nominal-GDP basis, the Chinese economy is slated to exceed the United States economy in 2030. If you only evaluate the PPP value, on the other hand, this result will occur in 2020.

The World Bank revised China's PPP GDP downward based on real survey data. This would have made its PPP adjusted GDP less than 6 trillion last year.

http://www.fas.org/sgp/crs/row/RS22808.pdf

Originally Posted by Equilibrium

I believe China is just posturing for the G-20 summit to distract policymakers from China's policy of artificially controlling the value of the renminbi.

If not, then China is merely trying to protect the currency holdings it accumulated when the market was in its favor. Now it is trying to dodge paying the risks that same market presents to China.

It tied its economic expansion to the US market and it paid off handsomely. Now, it is finding out that the road from Beijing to the US market also goes in the reverse direction.

Thats a pretty risky view to take; whatever China's Currency is Valued at.
China isn't necessarily trying to protect it's currency holdings, as it is seeking re-assurance. The reason for this is very simple.

The U.S Fed Deficit is now pretty close to 11 Trillion. That Deficit is packaged as bonds, or securities or whichever terminology you want to use; however the bottom of the line is that it is sold, to other countries, I.E other countries LOAN the money to the U.S to fund their government. I.E the U.S Govt isn't a self sustaining entity relying on itself (it's actually a leech to put it not so nicely). Nothing is going to change, and indeed that deficit is projected to double by 2020. Factoring in health care commitments not helped by the prev administrations reneging of the Pay as you go system, means that the federal deficit is only going to get larger.
The problem with that, is that it's exceedingly dangerous - one shouldn't need to elaborate why.

Whether China Trade's with the U.S is diminishing or not is irrevelant, what is relevant is the dept outstanding, the U.S Govt's ability to repay the dept with it projected to rapidly increase, with a population not spending as much as it was, with the government not making as much tax as it was. You can't forclose on the U.S.A. At some time in the next 30 years, if the expenditure isn't reigned in, the current economic crisis will look like childs play. You must either tax more, or slash spending. The fact that the U.S Govt owes about $32,500 USD per every citizen in the U.S.A to foreign creditors, is astronomical. How would you quantify that in the amount of tax you pay, or a child pays, or a senior citizen pays? If that scares you, try doubling that dept by 2020. China owns a decent sized proportion of that dept.

If you told Ike that the U.S Govt would be being directly funded by Communism 50 years ago he wouldn't have believed you. But these days voters cast their vote based on less tax, or more programs and expenditure. This is why H.W lost to Clinton, he realised that you'd have to tax to avoid the alternative that the public doesn't seem to understand, even though it is so damned simple: Communism finances the U.S Govt, so does the country that it dropped two nuclear weapons on, and so do various European countries that everyone was bashing in 2003... as repugnant as that seems!