Monday, January 09, 2006

"Reagan proved that deficits don't matter."

It will be fascinating to watch the media attempt to cover (or not) this incredibly delicate balancing act between China's sound financial policy and its social darwinian struggle for world domination.

China signals reserves switch away from dollar
By Geoff Dyer in Shanghai and Andrew Balls in Washington
Published: January 5 2006 20:13 | Last updated: January 6 2006 02:43

China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback.

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.

It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

“We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."

The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy
for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year.

The regulator also said it would end quotas on the amount of foreign currency Chinese companies can acquire to invest in overseas assets, a decision that removes a bureaucratic hurdle facing companies that plan to make international acquisitions.

The statement comes at a time of growing debate in China on how the reserves are invested Some economists have called on Beijing to use the funds to finance infrastructure investment and clean up state-owned companies, or to invest in higher-yielding assets rather than financing US borrowing.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was “vague”, Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

“It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,” he said.

The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July’s 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar.

John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. “The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,” he said.

However, some economists believe it would be a mistake for China to shift its reserves into domestic investment or other asset classes.

© Copyright The Financial Times Ltd 2006. "FT" and "Financial Times" are trademarks
of the Financial Times.

11 Comments:

Blogger Germanicu$ said...

"Reagan proved that defecits don't matter."

Whoever came up with that doozy needs to consider electroshock therapy. Was it Charles Krauthammer?

Meanwhile, all sorts of great ideas are coming out of the woodwork, just waiting to be implemented. And who do we have to thank for it? The labor movement! Check it out - the SEIU presents "...an unprecedented national conversation about how to strengthen the economy and improve life for working men and women and their families."

http://www.sinceslicedbread.com

3:31 PM  
Blogger Jeff said...

"Was it Charles Krauthammer?"

It was Five Deferments

3:39 PM  
Blogger hurtleg said...

sorry, I don't read Kos. Who is five deferments?

4:12 PM  
Blogger sexyretard said...

I noticed "let's just all get schlocked off of whiskey" didn't make the list of "good ideas," but I think it would do a lot more good than anything they are proposing, although I agree with the whole massive public works idea, provided they actually work.

4:50 PM  
Blogger Jeff said...

Five Deferments is Cheney, though you wouldn't know that from reading Kos.

5:09 PM  
Blogger sexyretard said...

Why exactly, again, are we in bed with the Chinese? What have they done for us lately, except increase our trade deficits and use up all of our oil?

9:03 PM  
Blogger Jeff said...

"Why exactly, again, are we in bed with the Chinese? What have they done for us lately, except increase our trade deficits and use up all of our oil?"

They, along with their slanty-eyed rivals from across the sea, continue to purchase mountains of US treasury debt at prevailing interest rates, thus enabling reckless government spending and bolstering the value of the dollar. I don't know if this would be viewed as a positive reponse to Miss Jackson's rhetorical question, but it's sure something.

11:23 AM  
Blogger Pete Sampras said...

"Why exactly, again, are we in bed with the Chinese? What have they done for us lately, except increase our trade deficits and use up all of our oil?"

Aside from making millions of Americans rich while endangering the American economy, and acting as a partner in resolving the North Korean crisis while being a threat to American interests in Asia, it is not a wonder why Americans are asking "what China has done for us lately".

Like any super power, China is entitled to its agenda on achieving super power status and has a right to manipulate its currency in the decided manner fair or not. Looking abroad and demonizing foreign governments is providing a scapegoat for the current administration's inadequacies in handling foreing policy. There is mishmash of polcies towards China. There is needs to be a clear US policy to articulate how the US is to deal with China as an economic and political-military power.

The question should be redirected to ask "What has the Bush Administration done for us lately?"

12:24 PM  
Blogger Pete Sampras said...

Excuse the typos, I'm at work and don't have the time to proof non-related work writings.

12:31 PM  
Blogger Pete Sampras said...

"They, along with their slanty-eyed rivals from across the sea, continue to purchase mountains..."

Dude, what the f#$k?! Keep your racial epithets on the down low unless you're advertising for members from the World Church of the Creator.

12:49 PM  
Blogger Jeff said...

"Dude, what the f#$k?! Keep your racial epithets on the down low unless you're advertising for members from the World Church of the Creator."

Sorry dude. I take it you would consider "slope" objectionable as well? You have to cut me some slack--it's hard to keep track of what's "politically correct" these days, what with the internet and all.

1:23 PM  

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