Oh, the trials and tribulations of sitting on $2.5 trillion. That's how much China holds in foreign currency reserves. And in this period of market turmoil and economic uncertainty, what would you do with it? I can't figure out where to put my far more meager earnings. I couldn't begin to guess where I'd invest trillions.
China's leaders are probably having a tough time of it as well. The name of the game in recent years has been diversification. Most of China's reserves are likely in U.S. dollars. We don't know exactly how much, since China doesn't break down its reserves by type of currency. Fearful of placing all of its eggs in one currency basket, it has aimed to protect its national wealth by increasing its holdings of other currencies, thus creating a more balanced portfolio. That seemed to make sense. If you recall, not too long ago it was the greenback that was supposed to be knock knock knockin' on heaven's door.
Now "“ surprise "“ we have a euro crisis. The dollar is looking groovy. The euro is doing its best impersonation of Wile E. Coyote plunging from a cliff with an anvil tied to his back. That has only complicated the lives of China's policymakers. And what they decide to do could have major repercussions for currency markets and the global economy.
That was made abundantly clear this week when a mere media report that China was rethinking its holdings of euro assets was enough to send the euro and global stocks tanking. The Chinese government later called the report "groundless" and markets reversed themselves. This episode clearly demonstrates the kind of power China now holds over currency values worldwide. How China chooses to invest its trillions will ripple through the values of global currencies and impact export competitiveness and job creation for countries throughout the world.
It also shows the dangerous position China has gotten itself into by amassing such a hoard of hard currency. China's currency managers can very easily make their own worst fears come true. Ditch the dollar and watch the value of the greenback slump, and your national wealth with it. Ditch the euro because you think it's in trouble, watch everyone else follow your lead, and lose money on your euros.
I'd be dumbfounded if China wasn't reevaluating its position in euros right now. The general consensus is that the euro will keep giving up ground, perhaps all the way to parity with the dollar. My guess is that China in recent years has been collecting its fair share of euros as it attempted to balance its stash of dollars. Now it's stuck with a bunch of rotting euros. China's financial managers are like any investors "“ they want to preserve wealth and increase returns "“ and if they aren't worried about their euros, I'd be worried about them.
China also seems to have been softening its attitude towards the dollar. Notice how quiet Beijing has gotten on the whole let's-replace-the-dollar-as-a-world-currency mantra that was so popular last year. China has also resumed building up its holdings of U.S. Treasuries after a few months of reducing them. Again, like all investors, China seems to be engaged in a flight to safe havens.
Is Beijing learning anything from its experience with this little exercise in guessing currencies? What Beijing should be figuring out is that continuing to build up an ever bigger mountain of foreign currency reserves isn't really getting the economy anywhere, that it needs to rebalance towards domestic demand to reduce its current account surpluses, and that it finally needs to reform its counterproductive currency regime to help that process along. Those steps would as well give more credibility to China's desire to see its own currency, the yuan, more widely used in global trade and finance. But my guess is that Beijing will do the opposite. In times of stress, Beijing tends to get conservative and shy away from change. That means it'll just have to figure out where to put more and more of its money. In a few more euros perhaps?
Michael, if anyone outside China knows, how much is actual hard cash or in-kind vs. bonds, etc. that change in value daily "¦meaning of course, if they try to dump our Treasuries in big chunks the values fall and they get burned? (or your best guess / tea leaves if unknown) Or are they hording gold or other commodities? What other countries' currencies do China and other traders value most now? Japan, UK, or others? . Before our commentariat brethren ask (again) about what happens to Euro if Eurozoners are allowed to print their own Euros to pay off debts, etc., I wonder if China is quietly pressing for Euro changes "¦or even dissolution to buy strong German Marks instead of delicate flower Greek drachmas? What have you heard / your thoughts? Or perhaps they're investing more in companies, mines, etc. and avoiding curencies? I think they are trying this in Australia, maybe Germany would be a good choice too. Our real estate certainly is a value now; China would at least avoid Japan's disastrous "?80's deals. Just don't buy derivatives based on subprimes. Thanks for your thoughts.
The problem is that we really don't know what China does with its reserves. The government doesn't tell us. We have some data from outside of China -- we know, for example, China's holdings of US T-bills, because the US government releases the statistics. But what the actual break down may be is unknown. Analysts usually estimate that at least some two-thirds of China's reserves are in US dollars or dollar assets. But that's a guess. China can be doing quite a bit with its reserves without us knowing about it for a while.
Helloï¼?your view is really unique.That's ture that China may not only consider to put its large currency reserves in the currency market. In fact ,it is urgent for China to invest its wealth more on resources like iron ore ,copper ore ,aluminium ore and of course oil. If America or European countries can loose their high-tech export limit, China won't be mean in these kind of Intangible assets investment.
Michael, China is not like you and me. It is a monetarily sovereign nation, meaning it has the unlimited ability to create its money.
From China's standpoint, the value of the dollar and the value of then euro make no difference. If by magic, China's stash of foreign money suddenly disappeared, China simply would create more yuan, then trade them for dollars and euros and oil and rice and whatever else it wanted.
Yes, there are inflation implications, but once again, a monetarily sovereign nation does not adhere to the money rules that guide us mortals.
Rodger Malcolm Mitchell
What is the definition of a monetarily sovereign nation?
What other nations are included under this definition?
Why do you believe that these nations do not adhere to the economic laws of other nations?
Given Chinese manufacturers' huge biz wih Walmart, China should offer to buy WMT outright. And the Walton family should refuse the offer: they can play Vietnamese / Mexican / other suppliers against the Chinese to keep driving prices down (and keep driving down employee wages and benefits too, but they'd do that anyway. But I digress)
I agree with this statement in the article... "...that it needs to re-balance towards domestic demand to reduce its current account surpluses..."
Domestic demand is growing, which is reducing the capacity to buy foreign currencies... and making China strong internally...
http://www.china.org.cn/business/2010-05/26/content_20124548.htm
Michael, An international reserve currency is not a Chinese idea. It was proposed already by John Keynes. Joseph Stieglitz see it as inevitable for global economic stability.
What are your thought on this?
We have a reserve currency. The dollar. The question is will it be replaced with something else, and if so, what. The issue is that there are no clear alternatives. Obviously not the euro. The idea of using the SDR of the IMF is a possibility, but we're far far far away from anything like that happening. My guess is that there may be a natural transition away from the dollar and towards a multi-currency system, over a very long period of time, say, 20 to 30 years.
chrislarsson,
A "monetarily sovereign" nation is the sole issuer of its money. It's money is not tied to any other money. It is not constrained by a standard (gold standard, silver standard). It's money has no intrinsic value. A monetarily sovereign nation has the unlimited ability to create its money, and so, cannot go bankrupt.
See: Monetarily Sovereign
The U.S., Canada, Australia and Japan are examples.
The EU nations are not monetarily sovereign. None is the sole issuer of its money. Each is constrained by the EU rules and none has the unlimited ability to create its money. Each can go bankrupt.
The states, counties and cities in the U.S. also are not monetarily standard, which is why so many teeter on the edge of bankruptcy.
For the above reasons, an international reserve currency would be a disaster, unless there were some overseeing body, similar to the U.S. government, that would create money as needed by each nation.
Michael Schuman, I know of no benefits offered by an international reserve currency and plenty of problems. The euro is a perfect example of a poorly crafted idea.
Rodger Malcolm Mitchell
Mean "monetarily sovereign," not "monetarily standard."
As the entire world knows, China is currently buying gold and Swiss francs, in relatively very small lots, very slowly and as quietly as possible. On the other side, what it has been doing for the last 11 months is not buying USA securities. I must confess that I do find it puzzling, nay baffling, that Mr. Schuman seems unaware of what the entire world knows.
How does this benefit or threaten anyone?
I saw an article today that adds more to this topic... wage inequality in China... affluence and house prices... If wages rise, there will be more imports, then their trade surplus wll decrease...
http://www.nytimes.com/2010/05/29/business/global/29honda.html?th&emc=th
Don't believe there,
just look here :
http://japan-russia.jimdo.com/quality/
This a US dilemma, not China one
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