Look, I love the Financial Times, but even the pink paper has its off moments.
Today, the FT reports, with the journalistic equivalent statement of a straight face, a patently ridiculous statement from China’s State Administration of Foreign Exchange:
China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.
But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies.
The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold.
Yves here. Earth to base, China did not buy dollar assets as in investment. Its purchases were made as part of a mercantilitst strategy to keep the renminbi cheap and thus assist exporters. The wee problem is that its huge dollar assets have become a contentious issue domestically, with many Chinese resenting the fact that China’s holdings of dollar assets are likely to depreciate. Well, that was inevitable. Emerging markets currencies typically appreciate as the country develops. So any large scale investment in foreign assets in an advanced economy was likely to be a bad bet. And it was CERTAIN to be a bad bet if those assets were acquired with the deliberate intent of keeping your currency low relative to the currency being acquired. As Dean Baker pointed out, apropos a 2008 New York Times story:
It was understandable that China’s central bank might buy up dollars in a conscious effort to keep the dollar high and thereby sustain its export market to the United States. This would mean that China was effectively paying people in the United States to buy its exports. This would be a reasonable growth strategy if China for some reason lacked the capability to generate this demand internally….
However, it would be bizarre if China’s central bank bought up dollar denominated assets in the last 7-8 years thinking that they were making a good investment…..Apart from buying bonds from Zimbabwe, it’s hard to imagine how they could have made a worse investment.
If the people who run China’s central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.
Put it another way, the idea that China would “punish” the US by selling dollar assets is as credible as Cleavon Little’s pretending in Blazing Saddles that his threat to shoot himself is, well, a threat:
Except in life as in fiction, some people actually seem to buy it.
If China dumps dollar assets, its currency would soar in value. That’s the last thing it wants. So the only conclusion possible is that the Chinese are as dumb as the Blazing Saddles townspeople, or they need to make impressive sounding empty pronouncements to appease a domestic audience.
Once it gets past the silly headline (“China rules out ‘nuclear option’ on T-bills”) and recitation of SAFE’s blustering, the FT article does provide some useful intelligence on the question of when and how China might move away from a currency policy fixated on the dollar to one that looks at a broader range of currencies (it announced such a shift in 2005, took a small step towards implementation in 2007, returned to a dollar peg in 2008, and announced it would adopt a more market oriented posture and again manage the RMB against a basket of foreign currencies, but there has been nary a clue as to when that might actually start to be implemented). The details:
Safe’s comments coincided with the news that China had made record purchases of Japanese government bonds in the first four months of the year, helping push the yen to an eight-month high against the dollar.
Analysts said it was too early to tell whether China’s move into JGBs was the start of a trend, but Greg Gibbs, FX strategist at RBS, said unlike in the US, Tokyo would not welcome foreign central banks routinely accumulating yen assets.
Yves here. This is a nasty bit of business. Keeping the yen at elevated levels is damaging to Japan. The US tolerated the yen at a lower level than it arguably should have been in the 1990s precisely because a strong yen would have been devastating to its fragile economy. The FT again:
“If this persists it may generate tensions between Japan and China. It would seem a little ridiculous for Japan to allow the yen to be pressed upwards by inflows from China, when Japan is not able to counter with renminbi asset purchases,” said Mr Gibbs.
And if you think the dollar is a bad investment longer term, that’s at least as true of the yen. It’s significantly overvalued and has terrible demographic headwinds on top of its persistent deflationary pressures.