Pay No Attention to the Man Behind the Curtain
Chuck Ponzi March 21st, 2007
After today’s rousing repeat, of doing nothing, the FED is having one of its final days in the sun.
Change is afoot that has the potential to drown out any discussions of rate cuts in the future. I’m talking about China’s currency reserves.
China will stop stockpiling its massive foreign exchange reserves, China’s central bank governor Zhou Xiaochuan said in an interview published Tuesday.
“Many people say that foreign exchange reserves in China are [already] large enough,” Zhou told the Emerging Markets magazine, whose latest issue was released at a meeting of the Inter-American Development Bank in Guatemala.
“We do not intend to go further and accumulate reserves,” Zhou said, adding the government will “cut a small piece of reserves” for a new agency to be set up for the management of its massive foreign reserves, which have swollen because of the trade surplus.
He did not say how much money would be passed to the agency.
China’s premier, Wen Jiabao, said last week that plans to form a new agency to invest part of the country’s swollen foreign exchange reserves, the world’s biggest at more than $1 trillion, would not have an adverse impact on the U.S. dollar.
Right, I guess it all depends on what you consider “adverse impact”. With the USD just recently testing the 80 mark and accumulation stopping, we may have a hard time selling too many treasuries the the remaining buyers.
Time to monetize that debt, baby!
Chuck - I believe you have misunderstood Mr. Zhou’s intent. The reserves will go to the new agency(ies) the Chinese are creating. See Brad Setser’s web site for a detailed description. Should China sell all the dollars that it receives, it would most certainly “have an adverse impact on the U.S. dollar.”
Gab,
No, even after reading Brad’s blog, I’m confident that my understanding is correct. They are not diversifying… which would absolutely have a large, immediate and negative impact on dollar exchange expectations. I made it clear that accumulation would be stopping. I see no other way to read that, and Brad’s site confirms my understanding that they intend to halt accumulation. That’s still a concern when their reserves have been growing at such an astronomical rate that it has suppressed the USD FX and interest rates.
If true, this has huge implications. If the Chinese stop accumulating our currency, the dollar will fall. If Chinese goods become expensive for American consumers, both economies will suffer. Chinese stocks will plummet along with their exports, and their whole economy will enter a deep recession. We will follow them into the abyss.
Of course the good news is that all the US Treasuries the Chinese purchased will lose value, and the Chinese will lose to the extent the exchange rate changes. In other words, they are doubly F’d. At least we get to leave them holding the bag on our 1% treasury notes.
I, for one, welcome our new Chinese overlords.
Reminds me….
Yay, communism, groovy, smashing, shagadelic.