The Nation: Will China Choke on U.S. Dollars?

[marmar]

posted February 6, 2007 (web only)
Will China Choke on US Dollars?
Nicholas von Hoffman

The dragon twitched. The dragon, which is China, twitches every so often, and when it does, ears prick up across the world of trade and finance. Dragons can, as you know, breathe fire when they choose to, and should the Chinese dragon emit a plume or two of flames, ordinary people living as far away as Ashtabula, Ohio, may get their fannies scorched.

The latest twitch took the form of Chinese Premier Wen Jiabao making the apparently tepid remark that his country would "actively explore and expand the channels and methods for using foreign-exchange reserves." The underlying meaning may not be so tepid, for Wen appears to be saying that the day may not be so far off when China is going to slow down giving American consumers credit for merchandise purchases.

Another way of looking at this would be that China may be losing its taste for lending the United States money that indirectly helps America to fight its ever-lengthening series of Middle Eastern wars. Every year America goes a couple of hundred billion bucks deeper into hock to the dragon.

No sooner had the dragon twitched once than it twitched again a few days later at the World Economic Forum in Davos, Switzerland, where the world's fattest money bags annually meet up with big-time politicians, whatever celebrities happen to be hot at the moment, chittering economists and enough journalists to make sure anything of moment is recorded. It was not the place you would expect to find a Chinese dragon, but the scaly fellow, this time in the person of Madame Wu Xiaoling, the deputy governor of the People's Bank of China, said that holding a trillion dollars' worth of another country's money was enough.

Wu Xiaoling's message, couched in much politer language, was that someday American consumers are either going to have to pay their way or do less shopping at the dragon's mall. This is news that ought to be received with joy in Washington. ......(more)

The rest of the article is at: http://www.thenation.com/doc/20070219/howl

[IDemo]

1. The dragon seems to be stirring this week -

http://www.atimes.com/atimes/China_Business/IB03Cb08.html">China aims to spend $200bn of reserves

By Zhou Jiangong

SHANGHAI - The Chinese government is taking action to implement a new policy of diversifying the disposal of the country's over US$1 trillion foreign exchange reserves which was initiated by the Central Conference on Financial Affairs three weeks ago.

The Ministry of Finance (MOF) is planning to issue yuan-denominated bonds to raise funds that will be used to "buy out" as much as $200 billion from the country's foreign reserve pool.

<snip>

The new policy to diversify the disposal of the country's huge yet growing foreign exchange reserves is also bound to change China's current foreign exchange management regime, which is dominated by the State Administration of Foreign Exchange (SAFE).

According to the People's Bank of China, (PBoC), the central bank, the SAFE is responsible for the stewardship of the largest foreign exchange reserves in the world. It is estimated that over 60% of the reserves are invested in US Treasury bonds, with an annual return rate of about 3.5%.

It is risky to put all eggs in one basket. Also, the expected appreciation of the yuan is worrying the Chinese government. If the US dollars depreciate against the yuan by 5% this year, which is almost certain, the reserves will "shrink" by $50 billion against the yuan, equivalent to the amount of capital the Central Huijin Investment Co has injected into Industrial and Commercial Bank of China (ICBC), Bank of China (BOC) and China Construction Bank (CCB).

Such concerns finally prompted Beijing to decide to reform the management of its foreign exchange reserves.

[jody]

2. China choke? No, it will invest in Central and South America using NAFTA to destroy U.S. industry.nt

[twilight_sailing]

3. That's a damned interesting point.

[tom_paine]

4. What industry? Do we still make stuff?

Or are you talking about our nation's greatest export, which in these degenerate days of Little Boots Bushler is internet porno.

Are we due for an influx of Central American porno vids? Is that what you are trying to say?

:sarcasm: