http://www.asianews.it/index.php?l=en&art=14131&size=A01/03/200901/03/2009 17:55
ASIA - CHINA - U.S.
Chinese yuan set to replace dollarby Maurizio d'Orlando
Beijing has launched the experiment of using the yuan as a reserve currency in relations with 8 countries. Chinese exporters are asking to charge in yuan instead of dollars, because the U.S. currency is losing value. But China needs to revise its model of development, too much inspired by eighteenth century mercantilism.
Milan (AsiaNews) - While the comments of economic observers have focused on what is happening to U.S. public debt and to financial markets overseas, the news media rarely mention what is happening in Asia, almost as if there were not a strong correlation between the two phenomena. But it is logical that a substantial accumulation of foreign exchange reserves in China, Japan and throughout Asia corresponds to an unprecedented supply of dollars, the global reserve currency.
But Asia now understands that the increase of money supply decreases the intrinsic value of a currency. That is why China is seeking a possible and rational attempt to decouple Asian currencies from the dollar, as recent news stories report [1].
In practice, China is trying to make its currency convertible and give it a role as a reserve currency. The first experiment is limited to transactions between Hong Kong and the neighboring provinces. It is also proposed that the yuan renminbi be used in 8 neighboring countries, including Russia. With these countries, agreements have already been signed for the settlement of contracts in the Chinese currency. Perhaps it is no coincidence that the news was released on Christmas Day, when Western markets are closed, reducing the impact on the dollar. In addition, the first weeks of January are usually fairly quiet. This means that although for now the trial is limited, China is preparing to establish full convertibility of its currency to all other currencies. Many in China have spoken out directly or indirectly in this regard: for example, Wu Xiaoling, former vice governor of the central bank, and Zhao Xijun, a professor of finance at Renmin University of
China. The current governor of China's central bank, Zhou Xiaochuan, in early December in Hong Kong had indicated that if the value of the dollar fluctuated drastically, its use as a settlement currency (for commercial transactions) would cause problems. It is clear that Chinese exporters, behind the scenes, are asking the government for permission to charge in yuan instead of dollars, which are losing value. Other warnings came in the middle of last December: the increase in purchases of U.S. Treasury bonds should not lead to the supposition that the U.S. can borrow its way out of the financial crisis [2]. Finally, on January 1, a well-known Chinese economist, Wu Jinglian, wrote that China must change its development model [3], with reference to the paradigm of economic growth driven by exports. We note, incidentally, that even the pope, who obviously has mainly pastoral responsibilities, has said the world must change its model of development [4]
("Are we are prepared to conduct together an in-depth review of the dominant development model, to correct it in a comprehensive and forward-looking way?" Benedict XVI asked).
Toward full convertibility of the yuan
If, after a trial period, China makes its currency convertible, the consequence is that importing countries must have reserves of yuan renminbi. To get them, central banks around the world will have to divest themselves of U.S. assets and Treasury bonds. The euro has a rather limited role in Asian exchange. In this case, a currency crisis would be triggered by the substantial and artificial lowering of the exchange rate of the yuan, of which we have written in the past [5]. The intention of the Chinese leadership is to correct this undervaluation, of which they are fully aware. The newspaper of the Chinese Communist Party, the People's Daily, summarizes the thinking of China's foreign trade minister, Chen Deming, with the questionable assertion that China does not intend to promote exports by the depreciation of (its) currency [6]. It would have been more correct to say that it no longer does so, since that is what it had done since January 1, 1994, when
the Chinese currency was devalued in real terms by about 55%. Western businessmen, first and foremost Americans, attracted by wages at the margin of subsistence and a workforce without rights, on the verge of slavery, have financed the transformation of the country from a Stalinist economy. They provided 80% of investments. Industrial-style development has taken aim at maximizing profits as soon as possible, and therefore resulted in a significant waste of resources, namely labor and raw materials. Today, therefore, production lines have largely been transferred to China. Chen Deming says that if America and Europe are unable to pay, we will continue our expansion by exporting to emerging countries like India and Brazil.
The problems of mercantilism
China's problems don't end there. In the words of Chen Deming, and of a substantial part of the Chinese leadership, there are signs pointing to attempts to deal with another imbalance that is at the heart of the global financial crisis. Globalization, namely the lowering of tariffs, cannot help but produce imbalances if some countries are counting on growth driven by exports and protect their domestic markets by non-tariff barriers of various kinds. For AsiaNews, we noted in 2004 [7] that this trade distortion severely disrupts the use of resources. With a GDP - gross domestic product - (at current prices) in 2003 amounting to a little less than 4% of the world total, and with 20% of world population, China consumed 31% of the coal, 30% of the ore iron, 27% of the steel, 25% of the aluminum, 40% of the cement. In 2007, the proportion of Chinese consumption was even higher: for coal, it was 41.3%, more than 50% for iron ore, for steel 34%, more than 33%
for aluminum and more 50% for cement. In the words of Chen Deming, this reveals, in other words, the persistence among the Chinese authorities of a concept of international trade unchanged since the European mercantilism of the eighteenth century: the wealth of nations is the quantity of gold and silver they possess. The devastating impact of this conception can be illustrated by just one example. According to a "flash" on the Dow Jones Newswire (November 19, 2008) the Chinese central bank is considering increasing its gold reserves from 600 tons to 4,000 [8]. At current prices, 3,400 tons of gold are only 95 billion dollars, compared with reserves at the end of October of 652.9 billion dollars in U.S. Treasury bonds, for total Chinese foreign exchange reserves of over 2 trillion dollars. These rumors are not fully confirmed. If China intended to stockpile that much gold, the price of the yellow metal would skyrocket, but the rural population and
migrant workers wouldn't be much better off.
We hope that the mercantilist view will not prevail in China. Wu Jinglian writes in the Chinese magazine "Caijing": "Without this transformation [from an export driven development model to one based on internal needs], China could not solve the problems caused by excess consumption of natural resources, or environmental pollution, or the problem of too much investment [in fixed capital, plants and machinery] and insufficient domestic consumption, or the problem in the financial sector [the Chinese banks]."
[1] See Xinhua, 25/12/2008, Senior official: Renminbi likely to be used as currency for forex reserves, and ibid. China to begin yuan-settlement trials
[2] See China Daily, 17/12/2008, Keys to the Treasury
[3] See Xinhua, 1/1/2009, Noted economist urges China to change the pattern of growth
[4] See AsiaNews, 1/1/2009, Follow God who “became poor” to fight “unjust” poverty
[5] See AsiaNews, 09/12/2008 Economic crisis: US, China and the coming monetary storm, AsiaNews, 19/12/2008 U.S. debt approaches insolvency; Chinese currency reserves at risk
[6] See People's Daily Online, 24/12/2008, Commerce minister: China not to promote exports through currency depreciation
[7] See AsiaNews 24/04/2004 Greater conflict in Gulf would spark economic and social crisis. See also "Man" at risk in China's great development
[8] See DJNewswire cited by China PBOC Mulls Raising Gold Reserve Tons By 4000 - Report. Dow Jones keeps stories in its public archive for only two days.
[9] The items in square brackets are the author's clarifications.
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January 8, 2009
China Losing Taste for Debt From U.S. By KEITH BRADSHER
HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.
On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.
In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.
But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.
“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.
Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year.
China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.
For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.) The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings.
Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay. As those interest rates increase, they will put pressure on the interest rates that other borrowers pay.
When and how all that will happen is unknowable. What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money.
The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn on Monday that 2009 would be “a difficult fiscal year.”
A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and Freddie Mac — had for the most part been rising quickly ever since the Asian financial crisis in 1998.
The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars, so a weaker euro means that euro-denominated assets are worth less in dollars, decreasing the total value of the reserves.
But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appeared to reflect much broader shifts.
China manages its reserves with considerable secrecy. But economists believe about 70 percent is denominated in dollars and most of the rest in euros.
China has bankrolled its huge reserves by effectively requiring the country’s entire banking sector, which is state-controlled, to take nearly one-fifth of its deposits and hand them to the central bank. The central bank, in turn, has used the money to buy foreign bonds.
Now the central bank is rapidly reducing this requirement and pushing banks to lend more money in China instead.
At the same time, three new trends mean that fewer dollars are pouring into China — so the government has fewer dollars to buy American bonds.
The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories.
The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls.
So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.
A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.
China’s trade surplus set another record in November, $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run average trade surpluses this year of less than $20 billion a month.
That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008.
“The pace of foreign currency flows into China has to slow,” and therefore the pace of China’s reinvestment of that foreign currency in overseas bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets Ltd., a Hong Kong securities firm.
Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive.
For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.
Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks.
Treasury data from Washington also suggests the Chinese government might be allocating a higher proportion of its foreign currency reserves to the dollar in recent weeks and less to the euro. The Treasury data suggests China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp increase in Treasuries in October.
But specialists in international money flows caution against relying too heavily on these statistics. The statistics mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly than in the past.
The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.
China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment decision.”
Copyright 2009 The New York Times Company
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