'China cannot really dump the dollar'

[GoFlyKiteNow]

'China cannot really dump the dollar'

China's recent call for an alternative to the US dollar as a global reserve currency are motivated by political rather than economic, considerations, feels Michael Pettis, a professor at Peking University's Guanghua School of Management, and a specialist in Chinese financial markets.

In an interview to DNA, Pettis, who has worked on Wall Street in trading, capital markets and corporate finance, and has additionally been involved in sovereign advisory work, argues that doomsday scenarios about China "dumping the dollar" are exaggerated. "It's one of the things that keep us awake at night unnecessarily... It looks like an atom bomb, but there's nothing in it."

Excerpts from an interview:

China persists with its calls for an alternative to the US dollar as a reserve currency, but many economists say it's infeasible. What does China hope to achieve?

Much of it is for political purposes, internationally and domestically. Domestically, there's been criticism of mismanagement of investments abroad. There's rising concern about the hoards of dollars the People's Bank of China (the country's central bank) has... The (Chinese) government feels the need to indicate domestically that it's concerned about the value of these reserves and that it will do something about them.

But it's not clear what that means.
If you think US fiscal expansion will weaken the dollar, weaken it against what?
The euro and the yen? Currencies of countries that are seeing slower growth, more fiscal expansion and higher levels of debt? I don't think they've thought too carefully about what they mean because the purpose is not really to provide an alternative. It's to indicate domestically that we are doing something.

When they make comments that are unexpected, the dollar weakens. But since the Chinese are going to be holding on to these reserves not just for the next few weeks but for many years, the short-term impact of these comments on the dollar don't really matter. All this talk can't cause such a significant collapse in the value of the dollar that it starts feeding on itself and so, becomes a permanent collapse.

That's not going to happen?
This is mostly short-term noise. We hear this every decade or so -- with the Deutschemark, the yen, the euro, and now we're hearing it with the renminbi. If China wanted to hold special drawing rights (SDRs), there was nothing to prevent it. It could have accumulated reserves in the same proportion as in the SDR. Why didn't it do so?

The reason was that for trade reasons it was impossible.
China accumulated dollars because to generate massive employment growth, it needed to force its trade surplus, and the only place it could do so is the US economy. That's why they accumulated dollars, not because anyone put a gun to their head.

Do you see a consistency in China's stand in what it wants of the dollar?

A lot of people don't understand basic balance-of-payments arithmetic. All kinds of nonsense comes out. For instance, many people believe that the decision to lend dollars to the US government is an independent decision made by the PBoC. The confusion exists not just in the Chinese government but in the US government as well.

 

[High Command]

1) China can always go shopping in the US and buy up all the tech they need.

2) Economists these days are really not worth much.

3) We are all still screwed either way. :p

 

[longbow]

However by holding so much US Treasury the Chinese have a lot of influence over US financial system.

At the current rate of US budget deficits, it is entirely possible that the world loses confidence in US$.

 

[GoFlyKiteNow]

However by holding so much US Treasury the Chinese have a lot of influence over US financial system.

At the current rate of US budget deficits, it is entirely possible that the world loses confidence in US$.

how is that rationally and logically possible.?

When you hold something because you need to hold it,
and you have no other choice, and cant let go or go anywhere else,
then how will that have any influence ?

FYI:
The Japanese PostBank ( something like POSB here )
have 3 trillion dollars as deposits.
50% more than whole of China's reserves held abroad.
What influence does it have ?

 

[Hope]

However by holding so much US Treasury the Chinese have a lot of influence over US financial system.

At the current rate of US budget deficits, it is entirely possible that the world loses confidence in US$.

Here is the real distribution of US treasury Bills.



1. Federal Reserve and US Intragovernmental Holdings US $4.8 TRILLION
2. Mutual Funds US $769 Billion
3. China (Mainland) US $740 Billion
4. Japan US $635 Billion
5. US State and Local Governments US $550 Billion
6. US Pension Funds (401K's and IRA's Individual Retirement Accounts) US $456 Billion
7. Others (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts, estates, corporate and non-corporate businesses) US $413 Billion
8. Oil Exporters US $186 Billion
9. Caribbean Banking Centers US $176 Billion
10. Brazil US $158 Billion
11. Insurance Companies US $126 Billion
12. UK US $124 Billion
13. Russia US $119 Billion
14. Depository Institutions (commercial banks, savings banks
and credit unions) US $107 Billion
15. Luxembourg US $87 Billion

These figures were good up to March of 2009 and are sourced from the US Treasury, US Federal Reserve & US Office of Debt Management

China is the number one FOREIGN owner of US Treasuries

Of course,the global inbalance is truly a huge problem,but it is also very complicated

 

[longbow]

Haven't you witness US top officials making pilgrimages to Beijing to get assurances that Chinese not panic with its US holdings. Not a single whimper on human rights (Obama is not meeting Dalai lama even though he is in the US).

The world is looking at Chinese actions and should they sense any panic, everyone will rush for the door. And should that happen it would be a world wide panic.

As for Japan, always remember that Jap Gov are running huge budget deficits - 180% of GDP and expected to grow even more! Jap savings rates are at tipping point. Pop is aging very rapidly and a lot of this will be used for medical and retirement.

Also, Japan like Germany is much more dependent on the export economy. Their internal consumption is small. Japan has always been beholden to the US. After all US has 50K troops in Okinawa. Couple years back, Jap politician even published book "Japan that can say NO".

The Chinese are competing with US on the international stage for resources and political influence.

Just go read the recent G20 meet and you can tell it is all China and US. That is all I read. The rest of the G18 appeared irrelevant. And in a way, the current global economic situation very much rest on the shoulders of these 2 countries

 

[Hope]

However by holding so much US Treasury the Chinese have a lot of influence over US financial system.

At the current rate of US budget deficits, it is entirely possible that the world loses confidence in US$.

External Debt as % of GDP/ External Debt Per Capita/ Gross External Debt(Q4 2008)

1. Ireland 811% $549,819 $2.311 trillion
2. UK 336% $153,616 $9.388 trillion
3. Belgium 327% $155,362 $1.618 trillion
4. Hong Kong 295% $93,539 $659.93 BILLION
5. Netherlands 268% $145,959 $2.439 trillion
6. Switzerland 264% $171,478 $1.304 trillion
7. Austria 191% $100,787 $827.49 BILLION
8. France 168% $78,070 $5.001 trillion
9. Denmark 159% $107,026 $588.7 BILLION
10. Germany (Tied) 137.5% $63,767 $5.25 trillion
10. Spain (Tied) 137.5% $57,091 $2.313 trillion
12. Sweden 129% $73,245 $663.58 BILLION
13. Finland 116% $62,579 $328.56 BILLION
14. Norway 114% $118,353 $551.59 BILLION
15. USA 95.09% $44,358 $13.627 trillion


External Debt information from The World Bank

 

[Hope]

All these talks remind me Professor Ezra Vogel(a man our own MM Lee treated as one GURU 30 years ago)—whose 1979 book, Japan as Number One, earned him passionate approval all over the world and many believers,10 years later,he mentioned Japan number 30.

Today,154th reported that PM Lee said Japan would be a regional economic powerhouse for many more years to come.

 

[longbow]

It is not just China being number 1 holder of treasury but the speed at which it is accumulting US debt. On top of that HK separately holds another $77B in Treasuries.

India has $29B, Singapore $40B.

All is needed is a change in Chinese purchase and tide will change. But this will not happen overnight. Chinese are now diversifying and basically buying up as much resource based companies as they can. Read that as it is Chinese Oil companies now control more reserves than Exxon.

Here is the real distribution of US treasury Bills.



1. Federal Reserve and US Intragovernmental Holdings US $4.8 TRILLION
2. Mutual Funds US $769 Billion
3. China (Mainland) US $740 Billion
4. Japan US $635 Billion
5. US State and Local Governments US $550 Billion
6. US Pension Funds (401K's and IRA's Individual Retirement Accounts) US $456 Billion
7. Others (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts, estates, corporate and non-corporate businesses) US $413 Billion
8. Oil Exporters US $186 Billion
9. Caribbean Banking Centers US $176 Billion
10. Brazil US $158 Billion
11. Insurance Companies US $126 Billion
12. UK US $124 Billion
13. Russia US $119 Billion
14. Depository Institutions (commercial banks, savings banks
and credit unions) US $107 Billion
15. Luxembourg US $87 Billion

These figures were good up to March of 2009 and are sourced from the US Treasury, US Federal Reserve & US Office of Debt Management

China is the number one FOREIGN owner of US Treasuries

Of course,the global inbalance is truly a huge problem,but it is also very complicated

 

[GoFlyKiteNow]

Haven't you witness US top officials making pilgrimages to Beijing to get assurances that Chinese not panic with its US holdings. Not a single whimper on human rights (Obama is not meeting Dalai lama even though he is in the US).

The world is looking at Chinese actions and should they sense any panic, everyone will rush for the door. And should that happen it would be a world wide panic.

As for Japan, always remember that Jap Gov are running huge budget deficits - 180% of GDP and expected to grow even more! Jap savings rates are at tipping point. Pop is aging very rapidly and a lot of this will be used for medical and retirement.

Also, Japan like Germany is much more dependent on the export economy. Their internal consumption is small. Japan has always been beholden to the US. After all US has 50K troops in Okinawa. Couple years back, Jap politician even published book "Japan that can say NO".

The Chinese are competing with US on the international stage for resources and political influence.

Just go read the recent G20 meet and you can tell it is all China and US. That is all I read. The rest of the G18 appeared irrelevant. And in a way, the current global economic situation very much rest on the shoulders of these 2 countries

Simplistic arguments and claims.

You are grossly overstating the importance of China in the global arena..vis a vis other nations.

A communist country with an overly dependent export driven economic model ( thanks to the MFN status given it by Nixon )..where over 100,000 factories closed down during this financial crisis when markets in western nations shrank, where the party bosses dictate the lives of the citizens...where transparency on how the country is run is all but a myth..where the economic data that comes out is always kept in doubt...

Its much touted "stimulus package" was supposed to give global economy a push...instead it could not even give a small nudge to the relatively small economies of S.E. Asian nations around China. A few of their trade ministers occasionally make cynical jokes/remarks about this 'stimulus hype' in their meetings.

Ground realities that not proportional to the admiration or emulation, that you seem to proffer..

I better leave it at that...Enough said.

 

[longbow]

Goflykite - why not read what Roubini said. Article dated May 13 2009 which is after the economic storm so changes since then were not as great as articles before Mar 2009.

The moment you utter China's economy and communist in the same sentence leads me to believe that you do not understand Chinese economy. The Chinese are even more capitalistic than many democratic countries.

It is a very well written article and the gentleman is quite well regarded.

Read and Learn.



Op-Ed Contributor
The Almighty Renminbi?


NOURIEL ROUBINI
Published: May 13, 2009
THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

Nouriel Roubini is a professor of economics at the New York University Stern School of Business and the chairman of an economic consulting firm.

 

[longbow]

Given the world recession (lack of demand) the US and Chinese stimulus can at best stabalize the global economy. So the net effect is not boom time in SE Asia or India but the net effect is that there is no global depression.

Typical consumers are no longer spending so it is up to Governments to pick up the load.

 

[scroobal]

When you hold so much reserves in US dollars and Treasury biil, you will do everything possible to keep the US economy humming and dollar showing appreciation.

In fact, its US Govt and many government has asked the Chinese Govt to appreciate the value of the Chinese currency to balance trade.

However by holding so much US Treasury the Chinese have a lot of influence over US financial system.

At the current rate of US budget deficits, it is entirely possible that the world loses confidence in US$.

 

[longbow]

We keep hearing Treasury secretary say they want a strong dollar policy. But what happens behind the scenes is another matter (they keep dropping rates and incuring more debt, printing more dollar). The US and China are in a symbotic relationship and to sever this relationship would cause major disruption to both economies.

The talk about getting Chinese to appreciate value of Chinese currency (hold less US Treasury) is also politics. There is concern in the US that the Chinese will move away from US Treasuries (leading other countries to do the same). Even if the Chinese were to strengthen their currency by 20 percent, the US and first world nations would still be unable to compete in the industries that the Chinese dominate. However, if Chinese were to move away from US Treasuries US interest rates would shoot up.

3rd world nations would find it hard press to compete with the Chinese even if Chinese yuan strengthens by 20% because they cannot compete with the infrastructure, supply chain, manufacturing experience 9many Taiwanese managers), quality and potential domestic market that China offers.

When you hold so much reserves in US dollars and Treasury biil, you will do everything possible to keep the US economy humming and dollar showing appreciation.

In fact, its US Govt and many government has asked the Chinese Govt to appreciate the value of the Chinese currency to balance trade.

 

[scroobal]

You might want to read your earlier post which appeared contradictory - hold US dollars but have the influence to drop its value.

Even if Chinese currency go up 50%, its still will be the manufacturing hub for the world because labour is cheap, very cheap with millions to spare but it will increase the imported high end products into the Chinese market and therefore balancing trade.

The strong dollar policy is because, besides the Chinese, nearly everyone has US dollars as reserves. Note I said to appreciate the Chinese currency. Never said that to drop the value of US dollars.

We keep hearing Treasury secretary say they want a strong dollar policy. But what happens behind the scenes is another matter (they keep dropping rates and incuring more debt, printing more dollar). The US and China are in a symbotic relationship and to sever this relationship would cause major disruption to both economies.

The talk about getting Chinese to appreciate value of Chinese currency (hold less US Treasury) is also politics. There is concern in the US that the Chinese will move away from US Treasuries (leading other countries to do the same). Even if the Chinese were to strengthen their currency by 20 percent, the US and first world nations would still be unable to compete in the industries that the Chinese dominate. However, if Chinese were to move away from US Treasuries US interest rates would shoot up.

3rd world nations would find it hard press to compete with the Chinese even if Chinese yuan strengthens by 20% because they cannot compete with the infrastructure, supply chain, manufacturing experience 9many Taiwanese managers), quality and potential domestic market that China offers.