China Forex reserves reach record high

[Pk_Thunder]

Forex reserves reach record high

BEIJING - China's foreign exchange reserves, the world's largest, rose $194 billion in the third quarter to reach a record $2.65 trillion, which some foreign countries will likely use to pressure China to push forward a faster yuan appreciation, economists have said.

The country's total reserves increased by 16.5 percent year-on-year, according to figures released by the People's Bank of China, the central bank, on Wednesday.
"The reserve build-up is set to lead to growing foreign pressure for a faster yuan revaluation," said Sun Shijian, an economist at Fudan University in Shanghai.

The US House of Representatives has passed a bill empowering the government to use punitive measures if other countries, including China, are found touse an undervalued currency to benefit their trade with the US.

The yuan has risen by 23 percent since July 2005 and by more than 2.2 percent since June 19, when China vowed to make the currency more flexible.

But the increase seems to fall short for some foreign governments which continue to urge China to let the yuan appreciate more and faster.

"Foreign exchange rates may not be directly linked to the value of the yuan," Zhuang Jian, senior economist of the Asian Development Bank (ADB) in China, said.

"China has increased imports, which would help rebalance its international payments.

High-ranking Chinese officials, such as central bank Vice-Governor Yi Gang, have vowed to reduce the ratio of the country's current account balance - the trade balance - over its GDP from the current 6 percent to 4 percent.

China's trade surplus narrowed to $16.9 billion- the smallest in five months - in September because import growth overtook export growth.

Sun also warned the yuan's appreciation will jeopardize the massive foreign exchange reserves' value, because it will cause them to shrink in terms of the dollar.

"The US is, in a sense, trying to reduce its debt to China through pressuring (China) to appreciate its currency," he said. "China must develop strategies to use its reserves more wisely."

The central bank also said Chinese banks extended a net of 595.5 billion yuan in new yuan-denominated loans in September, compared with August's 545 billion yuan.

"The pressure on policymakers from increasing liquidity remains," Zhuang from the ADB said.

China recently decided to temporarily raise reserve requirements, or the money commercial banks must keep in reserves, for six major lenders. The move indicates "policymakers' worries about liquidity", Sun said.

But the West's gloomy economic outlook is likely to limit further tightening by China, Moody's Analytics Senior Economist Matt Robinson said. "Weak job growth in the US and fiscal austerity in Europe will dampen near-term consumer demand for Chinese exports."

Moody's Analytics expects no sharp tightening by authorities in 2010's final months.

"The government will (instead) try to strike a balance between insulating China's economy from global weaknesses and keeping the domestic housing market from rebounding," Robinson said.

 

[peaceful]

it is really unfortunate to have such a high foreign reserve.

 

[CardSharp]

it is really unfortunate to have such a high foreign reserve.

Not really necessarily a good sign. It might just mean that they don't know where to put the money.

 

[SBD-3]

The grasshoppers and the ants – a modern fable

By Martin Wolf

Published: May 25 2010 20:33 | Last updated: May 25 2010 20:33

Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want.

Yet life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”

Ants and grasshoppers are happy. Being frugal and cautious, the ants deposit their surplus earnings in supposedly safe banks, which relend to grasshoppers. The latter, in turn, no longer need to make goods, since ants supply them so cheaply. But ants do not sell them houses, shopping malls or offices. So grasshoppers make these, instead. They even ask ants to come and do the work. Grasshoppers find that with all the money flowing in, the price of land rises. So they borrow more, build more and spend more.
The ants look at the prosperity of grasshopper colonies and tell their bankers: “Lend even more to grasshoppers, since we ants do not want to borrow.” Ants are far better at making real products than at assessing financial ones. So grasshoppers discover clever ways of packaging their grasshopper loans into enticing assets for ant banks.

Now, the German ant nest is very close to some small colonies of grasshoppers. German ants say: “We want to be friends. So why do we not all use the same money? But, first, you must promise to behave like ants forever.” So grasshoppers have to pass a test: behave like ants for a few years. The grasshoppers do so and are then allowed to adopt the European money.

Everyone lives happily, for a while. The German ants look at their loans to grasshoppers and feel rich. Meanwhile, in grasshopper colonies, their governments look at their healthy accounts and say: “Look, we are better at sticking to the fiscal rules than ants.” Ants find this embarrassing. So they say nothing about the fact that wages and prices are rising fast in grasshopper colonies, making their goods more expensive, while lowering the real burden of interest, so encouraging yet more borrowing and building.

Wise German ants insist, gloomily, that “trees do not grow to the sky”. Land prices finally peak in the grasshopper colonies. Ant banks duly become nervous and ask for their money back. So grasshopper debtors are forced to sell. This creates a chain of bankruptcy. It also halts construction in the grasshopper colonies and grasshopper spending on ant goods. Jobs disappear in both grasshopper colonies and ant nests and fiscal deficits soar, especially in grasshopper colonies.

German ants realise that their stores of wealth are not worth much since grasshoppers cannot provide them with anything they want, except for cheap houses in the sun. Ant banks either have to write off bad loans or they must persuade ant governments to give even more ant money to the grasshopper colonies. Ant governments are afraid to admit that they have allowed their banks to lose the ants’ money. So they prefer the latter course, called a “bail-out”. Meanwhile, they order the governments of the grasshoppers to raise taxes and slash spending. Now, they say, you must really behave like ants. So the grasshopper colonies go into a deep recession. But grasshoppers still cannot make anything ants want to buy, because they do not know how to do so. Since grasshoppers can no longer borrow, to buy goods from ants, they starve. The German ants finally write off their loans to grasshoppers. But, having learnt little from this experience, they sell their goods, in return for yet more debt, elsewhere.

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich.

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.”

The Chinese leader does not want to admit that his nest’s huge pile of American debt is not going to be worth what it cost. Chinese people also want to go on making cheap goods for foreigners. So China decides to buy yet more American debt, after all. But, decades later, the Chinese finally say to the Americans: “Now we would like you to provide us with goods in return for your debt to us. Thereupon, the American grasshoppers laugh and promptly reduce the debt’s value. The ants lose the value off their savings and some of them then starve to death.

What is the moral of this fable? If you want to accumulate enduring wealth, do not lend to grasshoppers.

FT.com / Columnists / Martin Wolf - The grasshoppers and the ants ? a modern fable

 

[arihant]

It means China is holding more dollars than USA itself.

 

[CardSharp]

It means China is holding more dollars than USA itself.

anyone with a US dollar bill holds more than the US. They are 13 trillion dollars in the hole

 

[SandsofTime]

These days holding large dollar reserves is not a good idea as the value of dollar is falling. China should find a way to spend it away to boost their economy and to lend it to other nations so their economies are boosted as well. If US declares bankruptcy, there isn't much China can do to force the US to pay up, short of asking for the whole state of Texas for instance to recover the debt. But that would require a military effort which isn't likely.

On the plus side of the falling dollar, Pakistan's effective debt will also be reduced in real value terms. That means it would take less labor to produce the same amount of dollars and therefore repaying our debt would no longer be that difficult.

 

[arihant]

These days holding large dollar reserves is not a good idea as the value of dollar is falling. China should find a way to spend it away to boost their economy and to lend it to other nations so their economies are boosted as well. If US declares bankruptcy, there isn't much China can do to force the US to pay up, short of asking for the whole state of Texas for instance to recover the debt. But that would require a military effort which isn't likely.

On the plus side of the falling dollar, Pakistan's effective debt will also be reduced in real value terms. That means it would take less labor to produce the same amount of dollars and therefore repaying our debt would no longer be that difficult.

That is wrong assumption or just unrealistic myth.

 

[cloneman]

These days holding large dollar reserves is not a good idea as the value of dollar is falling. China should find a way to spend it away to boost their economy and to lend it to other nations so their economies are boosted as well. If US declares bankruptcy, there isn't much China can do to force the US to pay up, short of asking for the whole state of Texas for instance to recover the debt. But that would require a military effort which isn't likely.

On the plus side of the falling dollar, Pakistan's effective debt will also be reduced in real value terms. That means it would take less labor to produce the same amount of dollars and therefore repaying our debt would no longer be that difficult.

You have a good point,better than the pepole who think that holding 2.5trillion green paper is glory.Acturally Chinese govement is trying to minimize this threat by spending the reserve as much as possible:
1.Massive investment in energy,natural resource on international market.
2.Internally invest in the west part ot Chinas development.
3.Invest in other currency,like euro,japanese yan and s.korea dollar
However,that still costs part of the reserve since you cant buy as much as natural resource or other countries currency as you want.
Pepole in China are talking about a Chinese type Mashall Plan which is to invest huge amount of money on the developing countries infracture.The railway links China and Europe will be a good example.In the future,the Chinese goverment might have more plans to build road,bridges,high ways and rail ways in central asia,south east asia,south asia,Africa and Latin America.

 

[gpit]

These days holding large dollar reserves is not a good idea as the value of dollar is falling. ...

So,

1) US is manipulating the currency to devalue the dollar, which is now lower that that of Canada today.

2) US forces China to manipulate the RMB, the Chinese money, to make it rise.

and yet US congress fools say China is manipulating the currency.

What the hell is the logic?

 

[SBD-3]

These days holding large dollar reserves is not a good idea as the value of dollar is falling. China should find a way to spend it away to boost their economy and to lend it to other nations so their economies are boosted as well. If US declares bankruptcy, there isn't much China can do to force the US to pay up, short of asking for the whole state of Texas for instance to recover the debt. But that would require a military effort which isn't likely.

On the plus side of the falling dollar, Pakistan's effective debt will also be reduced in real value terms. That means it would take less labor to produce the same amount of dollars and therefore repaying our debt would no longer be that difficult.

the best strategy for China IMHO is
1) Reduce the trade surplus with US by importing more capital good and technology.
2) Diversify its trade partners
3) determine an optimal level of reserves and the liquid portion (what we refer to as liquidity trench) thereof and thus employ the remaining in real assets like precious metals (importantly Gold) or their related Investment avenues (like Gold deposits, Gold leasing, Gold linked instruments etc).
4) Allow the adjustment in RMB so that i would serve as automatic trade stabilizer.

 

[SBD-3]

So,

1) US is manipulating the currency to devalue the dollar, which is now lower that that of Canada today.

2) US forces China to manipulate the RMB, the Chinese money, to make it rise.

and yet US congress fools say China is manipulating the currency.

What the hell is the logic?

its not that simple what you say, lemme explain this phenomenon for you. USD is a reserve currency, which implies that Fed is not only the central banker to US economy, but significantly to all those countries as well who hold a significant portion of USD in their reserves. USD is a global currency which means that Fed dont enjoy the control over the money supply and demand determination as a central bank with a non reserve currency (what we refer to as capital account non-covertibility) so since there are many stakeholder in case of USD its natural tha Fed cant adhere to all, for example in the recent scenario of ailing US economy, Fed introduces Quantetative Easing (a monetary policy in which central bank tries to adjust money demand and supply by direct money injection rather than interest rate signalling) but such increased amount of USD led to fall in its value so the holders of US debt (treasuries, Corporate bonds etc) like China, Japan and other reserve holder witnessed their assets loosing value. But this was not intentionally done by Fed but rather with keeping in view the Only US economy rather than the whole stakeholders. Another argument is that if Fed would have not introduced QE then what would happen. countries like China, Japan and others gether reserves by utilizing the demand in US economy (US Imports) so if demand remain damp amid no QE then these countries would have also lost export earnings rather than fall in the value of their USD reserves. So eitherway these countries lose, but second option is more harmful for both the countries as shriking exports mean not only lack of growth in US but also job losses in China and Japan as producers will start lay offs as they witness their production shirking.
Secondly, China is effectively manipulating its currency by keeping it consistently undervalued which is achieved by forex interventions ( the supply of USD by Peoples Bank of China (PBoC) when USD demand increases its supply in order to keep USD at its current level) and thus RMB remains undervalued,Chinese exports remain cheaper and thus more export competitive. But what is bad is that China keeps accumulating USD which leads to a situation similar to the one mentioned in the article posted by me above.