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China’s dollar reserves being used to fight inflation?

Posted by WARREN MOSLER on April 28th, 2011

This may be some of the most recent data:

The SAFE Releases Data on Chinas External Debt at the End of September 2010


Excerpt: “At the end of September 2010, China’s outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD546.449 billion. Specifically, the outstanding registered external debt reached USD326.549 billion and the balance of trade credit totaled USD219.9 billion. ”

Then Mktwatch reported this end Dec 2010:

China’s external debt nears $550 billion: Safe

Escerpt: “HONG KONG (MarketWatch) — China’s external debt was $548.938 billion at the end of 2010, compared to $546 billion owed at the end of the third quarter, according to newswire reports Thursday that cited figures released by the State Administration of Foreign Exchange. Of that total, China’s short-term debt was $375.7 billion, or equivalent to 13.2% of China’s foreign exchange reserves, the agency said”

CAUTION,THIS IS ALL VERY PRELIMINARY AND COULD PROVE TO BE ENTIRELY WRONG

I got this response, and I’m looking further into it.

I don’t think this includes dollar debt of state banks and state owned enterprises.

What it means is that China’s net reserves aren’t as high as generally believed, and that they are being ‘spent/lent’ by borrowing dollars and then spending, leaving the gross, headline reserve number intact, rather than spending the reserves directly.

They could even be buying their own currency to drive it higher to fight inflation.

This would be an interesting, quasi desperation move, as it would mean they are willing to risk export markets to try to keep prices in check.

It would also help explain the downward drift in the dollar over the last 6 months or so.

And currency support under these circumstances is also, in general, unsustainable. If the trade flows have turned against them due to inflation, they will burn through all their reserves trying to support their currency without a lot more fiscal tightening at all levels, and a very hard landing as well. And even that might not be enough, depending on how institutionalized the inflation is.

All speculation on my part at this point.

15 Responses to “China’s dollar reserves being used to fight inflation?”

  1. Ramanan Says:

    Lot of people just quote liabilities to foreigners (of all local sectors) as external debt forgetting assets held abroad. Even in this they exclude equities.

    The link below has China’s net international investment position
    http://www.safe.gov.cn/model_safe_en/news_en/new_detail_en.jsp?ID=30100000000000000,240&type=&id=2

    China is doing fine … its Net Overseas Assets is $1.82T.

    Reply

    WARREN MOSLER Reply:

    yes, could be. but if policy has shifted to using reserves to support the currency that could be a sure sign it’s all turning.

    Reply

  2. WARREN MOSLER Says:

    Below are emails in response to my suspicions China is using their reserves to support their currency.

    As I said, it was speculation on my part that could prove totally wrong.

    I’m still looking for figures on the dollar debt of their banking system and state owned enterprises, if anyone has them, thanks!

    On Thu, Apr 28, 2011 at 7:32 PM, wrote:
    I asked our fx strategist to comment on the linked articles

    And I’d make the following points:-

    1. It’s normal for a country to have some USD debt (held by Ministry of Finance) whilst having USD reserves (held by cbk). These are two diff’ entities with two diff’ motives for holding the debt.

    2. China’s external debt is very small relative to reserves (relative to EM peers).

    3. China has plenty of ‘hidden’ reserves – commercial banks being obliged to hold USDs on their balance sheets, the banks recap funds, money given to CIC; none of which are reported on PBoC’s balance sheet.

    Given point 3, it’s the reverse situation.

    That is, China has more reserves than widely believed.

    4. (Finally) think about motivation – why wud China wish to make it’s reserves look larger than they really are? In fact, it’s the opposite – they don’t like having a high gross figure bec it attracts international pressure – which is part of the motivation for point 3.

    Hope that helps

    And:

    From: Simon (GM/SG)
    Sent: Friday, April 29, 2011 7:39 AM

    To: Giefing, Sean (GM/SG)
    Subject: RE: China’s dollar reserves being used to fight inflation?

    Actually this is a good answer!

    I tend to agree that they are far less confident than most perceive.

    Indeed, they are also less concerned about the reserve build-up than many people think.

    But/ don’t forget (at least in my estimation) they deliberately conceal the ownership of hundreds of billions of USDs, so, at the margin they find the high headline number a nuisance.

    AND THIS:

    4) why wud China wish to make it’s reserves look larger than they really are?
    Because they know better than people like Schumer that their economic growth and fx are both quite precarious and they are not as secure in the sustainability of either.

    Reply

    Ramanan Reply:

    China keeps running a surplus on the current account of the balance of payments and because its holding of reserve assets is so huge, it can declare the peg to anything it wants.

    A capital outflow will cause the currency to depreciate to some extent unless PBoC sells currency to undo this, but the fx graph shows an appreciation.

    An inflow which can lead to an appreciation, increasing dollar holding of either the banking system or the central bank which is not problematic.

    The US has been running a massive CAD and this surprised everyone. So then they started arguing that this process is unsustainable for China and only useful for the US. So the neoclassical argument is that China “sterilizes” this (because they believe in the money multiplier) but this process is unsustainable and will lead to inflation at some point when “sterilization” supposedly stops.

    This seems to have led some huge speculation that something bad may happen to China. It may be true that property bubbles may develop but may not be so difficult to handle given that the Chinese government understands the power of fiscal policy.

    .. and inflation is just 5% .. it can easily tolerate inflation of 20% or so. Also being a dictatorial nation, it can prevent any wage-price spiral and keep wages low.

    China can run any amount of surpluses .. only a collapse of the dollar causing troubles.

    China controls the currency by explicitly announcing the price. Hardly any intervention would be needed. Its like don’t fight the Fed .. don’t fight the PBoC…


    The daily U.S. dollar—renminbi trading price on the interbank spot foreign exchange market floats within a 0.5% range above and below the middle trading price for U.S. dollars announced by the China Foreign Exchange Trading System (CFETS). The trading prices for the renminbi against the euro. yen, Hong Kong dollar. and pound sterling float within a 3% range above and below the middle trading prices for non-U.S.-dollar currency transactions announced by the CFETS. The CFETS is authorized to announce the daily middle exchange rates for the renminbi against the U.S. dollar. euro. yen. Hong Kong dollar. and pound sterling at 9:15 a.m. each working day to serve as the day’s middle rates for the interbank spot foreign exchange market (including the over-the-counter (OTC) method and the matching method) as well as the middle prices for exchange rates in bank counter transactions….

    … The Peoples Bank of China (PBC) does not publish its intervention data. The People’s Bank of China Announcement on Expanding the Floating Band of Trading Prices of the renminbi against the U.S. dollar in the interbank Spot Foreign Exchange Market stipulates that the daily trading price of the U.S. dollar against the Renminbi on the interbank foreign exchange market floats within a 0.5% range above and below the middle rate for U.S. dollar trading published by the People’s Bank of China. Therefore, the officially published middle rate has a guiding effect on market exchange rates.

    - from IMF’s AREAER 2010.

    Reply

    WARREN MOSLER Reply:

    reads like you missed my point.

    Reply

    Ramanan Reply:

    No didn’t.

    China is just appreciating its currency a bit. Some minor intervention achieves this.

    WARREN MOSLER Reply:

    and if the trade flows have turned against china ‘minor’ turns to ‘runs out of reserves’

    but no way to know that yet.

    except they have thrown their exporters under the bus which means keep a close eye on it.

    Ramanan Reply:

    I see what you are saying. Trade flows through both the current account and the financial account can cause pressure on depreciation which induces sale of reserve assets. With a need for an appreciation, this effect is more magnified, since more sale of reserve assets is needed.

    Ramanan Reply:

    China has good trade surplus.. though recently reported a deficit (don’t know month or quarter etc) … Bloomberg thought it was not credible data reporting since they want to hide the surpluses so that the West puts less pressure on revaluing its currency.

    Capital Outflows can cause some issues if there is a feel in the market that something may go wrong in China.

    save america Reply:

    Rama, what is going to be the ultimate outcome of the ghost cities? Will we send detroit unemployed over there to fill them up? I don’t think so. I remember seeing beautiful developments in asia in 1999 that had been empty for years and mother nature was reclaiming them.

    ” it can prevent any wage-price spiral and keep wages low. ”

    The chinese truck drivers are unhappy. Our (USA) tax on the rest of the world is OIL, through our saudi and middle east branches – it is America’s and the wests tribute. Chinese mothers want that soccer mom shopping machine lifestyle we have given here, but they can never have it for all, how? Can we add another 30 million barrels of oil to world output in a year or 2? For them to get more, we have to get less, LOL! Soccer mom will send all 2 of her children to the battlefield to make sure our tanks and destroyers keep that oil flow in check. If that isn’t enough, we will pay mercenary armies like blackwater and recruit foreigners into our military with the promise of citizenship if they go protect the energy flows for team west. What does it matter if china has 200 trillion in dollars if we can control the price of thier food and oil and energy through our middle east operations? They tried to buy some oil interests out near california and security interests of the USA trumped their purchasing power.

    Reply

  3. Paul M Says:

    So at the end of the day, despite all the headlines about how the US is ceding its economic leadership to China and we are beholden to the Chinese Dragon, in actuality the reverse is true.

    It has taken a little longer but it seems to me the economic cold the US has is finally turning into a flu for China.

    The question is if there is a hard landing for China, how will it reverberate back to the US?

    Reply

    save america Reply:

    Those guys at wal-mart are saying shopping machine princess is about to see some changes, either her prices are going up, or her choices of whats on the shelf are going down. Warren says no problemo though, if china stops making our junk shopping trinkets and clothes, we will just restart the factories here. So I am curious to see a lot of detroit people used to making 30 an hour for nothing go back to work for 2 dollars an hour in sweatshop like conditions to keep USA spoiled princess happy and her shopping malls running.

    Reply

    Tom Hickey Reply:

    MacDonald’s just hired 62,000. Out of over a million job applicants. $2 looks pretty good when you are starving. Welcome to the New Normal.

    Reply

    WARREN MOSLER Reply:

    it should be good for us- lower commodity prices, etc. but we don’t understand federal taxes function to regulate aggregate demand, and not to raise revenue per se, so most likely we will continue to grossly overtax ourselves and blame others for our problems.

    Reply

    Mario Reply:

    interesting…so in other words, significantly lower taxes would help to offset our trade deficit. That sounds about right to me. Add on top of that a JG, wise fiscal policy that promotes positive business and industry growth and even monetary policy (specific lending programs targeted to increase business in certain industries and areas, etc.) and you’ve got things rolling again real fast here at home…even with our trade deficit. Yeah man!

    Reply

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