Comments on: Chinese Now Say "No Change" in Currency Policy; Treasuries and Dollar Back in Fashion

By: Bruce Krasting

Bruce Krasting — Mon, 29 Jun 2009 19:53:54 +0000

Yves,

We should expect that the Chinese will run B?OB and CA surpluses for ever, so you are right they are in the capital export business. There is no rule that the have to hold their US trade surplus in US dollars. They can pick any currency they choose for incremental reserves. They might even buy something more solid like copper, steel and other raw materials.

If Tim Geithner goes to China and says, "If you want to export to the US market you have to buy our bonds", we are going to have a problem. You can lead that horse to our water but there is nothing to say there are going to drink it.

By: Yves Smith

Yves Smith — Mon, 29 Jun 2009 19:37:34 +0000

Bruce,

Good point, but as long as the US is running a trade deficit with China, they (presumably) need to keep buying our bonds. And the Chinese trade surplus has not fallen, while the rest of Asia's has plummeted. So they are becoming the only game in town for now, capital export wise.

Setser, when our deficits were larger, stressed that the Chinese did not need to sell, merely buy less to cause problems for us. And the shorter maturities seemingly gives then even more opportunity to buy less (as in not replace maturing debt fully at some point....)

By: frances snoot

frances snoot — Mon, 29 Jun 2009 18:13:03 +0000

“Our foreign-exchange reserve policy is always quite stable,” Zhou told reporters at a central bankers’ meeting yesterday in Basel, Switzerland. “There are not any sudden changes.”

Did anyone suggest a "sudden" change? Why was Zhou responding to these charges?

Interesting the conversation took place in Basel, Switzerland.

By: frances snoot

frances snoot — Mon, 29 Jun 2009 18:08:13 +0000

"He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value."

Doesn't that controversial assertion sound familiar?

By: Bruce Krasting

Bruce Krasting — Mon, 29 Jun 2009 10:44:29 +0000

My info is that China is not selling any bonds. Their holdings of US paper is pretty stable. They have clearly reduced their holdings of FNM and FRE paper (who could blame them?) The reduction in Agency paper was offset by increases in direct T paper.

The problem that I see is that China is aggressively moving down the maturity of its holdings. They do not have to sell anything. If they wait two years 80% will have matured.

Moving down in average life when the yield curve is so steep is a costly decision. Therefore you must assume that they are doing this as part of an exit strategy.

The Chinese will vote with their feet. They are just taking their time doing it.

By: Brick

Brick — Mon, 29 Jun 2009 10:00:47 +0000

I see this as more of a clarification of intent rather than a reverse of policy. I once suggested on one of Brad Setser's blogs that China could stop buying a percentage of treasuries for a month to strong arm the US to review its fiscal policy. I think the clear message is that any large movement such as this could destabilise things and pose a threat to China's holdings. The message would be that the rebalancing will be slow to protect exports and the value of Chinas holdings. The question then becomes could their be conditions under which they could accelerate the transition and here I would be looking closely at the financial state of some of China's state enterprises.

By: ComparedToWhat?

ComparedToWhat? — Mon, 29 Jun 2009 05:48:21 +0000

Along with playing to the domestic audience, the first high-level China-US military talks in 18 months took place in China last week.

To other NC fans who may not be aware of Michael Pettis, he's put up some solid posts on China recently.

By: The Rude One

The Rude One — Mon, 29 Jun 2009 04:01:20 +0000

It is interesting that as soon as some relief from the downturn appears, the players return to orthodoxy and look forward to a restoration of the status quo ante. The tide of reform, feeble as it was, has already ebbed. Yet there are two unaccounted-for elements of dissonance in the emerging triumphal relief: the first is the ongoing bankruptcy of world finance and the second is the consciousness of this fact among the general population. When the next phase of the crisis breaks the authorities will meet opposition to their fixes. And so the tide will once again come in, this time in an atmosphere of greater global rancor and disarray.