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Tuesday 14 October 2008
China’s Grip on US Economy Grows
The US financial crisis may tighten China’s grip on the American economy, as Beijing is likely to purchase more US government securities using its ballooning foreign exchange reserves, experts say. PDF
The US financial crisis may tighten China’s grip on the American economy, as Beijing is likely to purchase more US government securities using its ballooning foreign exchange reserves, experts say.
The Chinese already hold about US$1.3 trillion (S$1.9 trillion) in US securities, about 70 per cent of their US$1.8 trillion of reserves, triggering fears among US politicians that the massive holdings posed a major Chinese threat.
But experts said that to prevent an erosion in the value of these current assets, China virtually had no choice but to keep buying US dollar denominated bills even as the United States risked plunging into its worst economic turmoil since the Great Depression of the 1930s.
‘They need a safe and liquid asset and there isn’t very much else out there in the world,’ Mr Eswar Prasad, the former chief of the China division at the International Monetary Fund, said.
‘If the Chinese stop sending money to the US, the US dollar is going to depreciate fairly quickly and because with the current account deficit, nobody is willing to finance them, the dollar has nowhere to go but down and that erodes the capital value of their assets,’ he said.
The United States has been running large current account deficits, which are to worsen as Washington bails out Wall Street from current turmoil using hundreds of billions of dollars.
Both the US presidential candidates Barack Obama and John McCain, in the run up to the November 4 election, have expressed frustration at the heavy US dependence on Chinese capital but they have few options.
‘The financing requirements of the US government is going to be very large, so somebody is going to have to pay for this,’ Mr Prasad said.
‘Of course, the US taxpayer will ultimately pay for it, but in the short term the taxpayer is already hurting because the jobs picture is not very good - the investments are falling’.
‘So having somebody like China come in and pick up more of the Treasury bonds that will help finance the deficit is actually a convenient thing for the United States,’ said Mr Prasad, now a senior fellow at Washington-based Brookings Institution.
Furthermore, US government bonds, despite the American financial turmoil, are still perceived by the market as among the safest asset - the US dollar has been ironically rising against key currencies except the yen in recent weeks.
‘One line currently making the rounds is that the only things anyone wants to buy right now are Treasury bills and bottled water,’ said US economist and winner of the Nobel prize in economics Paul Krugman last week in a reference to the credit starved money markets.
US Treasury Secretary Henry Paulson said at the weekend that he was ‘in close coordination and communication’ with China about its holdings of US dollars but did not elaborate.
He spoke after the finance chiefs of the Group of Seven major economies announced in Washington a five-point action plan to tackle the global financial turmoil stemming from a US mortgage crisis that rocked Wall Street.
China’s central bank has also pledged to cooperate to tackle the global financial crisis and maintain market stability, according to state media.
The pledge came after China joined the US Federal Reserve, the European Central Bank and other major central banks to cut interest rates amid fears of a slowdown that could hurt Chinese exports.
Meanwhile, a report by a group of US experts dismissed any fears that China could ‘dump’ some or all of its dollar holdings, a move it said could rapidly drive down the US exchange rate and push up sharply US inflation and interest rates at a time when the US economy is hovering near recession.
In the report, experts from the Washington based Centre for Strategic and International Studies and the Peterson Institute for International Economics cited three reasons why China would not rapidly reverse its policy of buying large amounts of dollars to maintain an undervalued exchange rate for its yuan currency.
- Any partial sale of their current dollar holdings, or even rumours of that, would drive down the value of China’s remaining dollar holdings, probably sharply; - Chinese sales of dollars would drive up the price of whatever currencies they converted into, adversely affecting China’s trade competitiveness and drawing protectionist reactions towards Beijing and; - China would be branded an ‘international pariah’ if it were to ‘dump’ its dollars in a ‘precipitous manner that generated global financial and economic instability.’
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China’s Grip on US Economy Grows
AFP
14 October 2008
The US financial crisis may tighten China’s grip on the American economy, as Beijing is likely to purchase more US government securities using its ballooning foreign exchange reserves, experts say.
The Chinese already hold about US$1.3 trillion (S$1.9 trillion) in US securities, about 70 per cent of their US$1.8 trillion of reserves, triggering fears among US politicians that the massive holdings posed a major Chinese threat.
But experts said that to prevent an erosion in the value of these current assets, China virtually had no choice but to keep buying US dollar denominated bills even as the United States risked plunging into its worst economic turmoil since the Great Depression of the 1930s.
‘They need a safe and liquid asset and there isn’t very much else out there in the world,’ Mr Eswar Prasad, the former chief of the China division at the International Monetary Fund, said.
‘If the Chinese stop sending money to the US, the US dollar is going to depreciate fairly quickly and because with the current account deficit, nobody is willing to finance them, the dollar has nowhere to go but down and that erodes the capital value of their assets,’ he said.
The United States has been running large current account deficits, which are to worsen as Washington bails out Wall Street from current turmoil using hundreds of billions of dollars.
Both the US presidential candidates Barack Obama and John McCain, in the run up to the November 4 election, have expressed frustration at the heavy US dependence on Chinese capital but they have few options.
‘The financing requirements of the US government is going to be very large, so somebody is going to have to pay for this,’ Mr Prasad said.
‘Of course, the US taxpayer will ultimately pay for it, but in the short term the taxpayer is already hurting because the jobs picture is not very good - the investments are falling’.
‘So having somebody like China come in and pick up more of the Treasury bonds that will help finance the deficit is actually a convenient thing for the United States,’ said Mr Prasad, now a senior fellow at Washington-based Brookings Institution.
Furthermore, US government bonds, despite the American financial turmoil, are still perceived by the market as among the safest asset - the US dollar has been ironically rising against key currencies except the yen in recent weeks.
‘One line currently making the rounds is that the only things anyone wants to buy right now are Treasury bills and bottled water,’ said US economist and winner of the Nobel prize in economics Paul Krugman last week in a reference to the credit starved money markets.
US Treasury Secretary Henry Paulson said at the weekend that he was ‘in close coordination and communication’ with China about its holdings of US dollars but did not elaborate.
He spoke after the finance chiefs of the Group of Seven major economies announced in Washington a five-point action plan to tackle the global financial turmoil stemming from a US mortgage crisis that rocked Wall Street.
China’s central bank has also pledged to cooperate to tackle the global financial crisis and maintain market stability, according to state media.
The pledge came after China joined the US Federal Reserve, the European Central Bank and other major central banks to cut interest rates amid fears of a slowdown that could hurt Chinese exports.
Meanwhile, a report by a group of US experts dismissed any fears that China could ‘dump’ some or all of its dollar holdings, a move it said could rapidly drive down the US exchange rate and push up sharply US inflation and interest rates at a time when the US economy is hovering near recession.
In the report, experts from the Washington based Centre for Strategic and International Studies and the Peterson Institute for International Economics cited three reasons why China would not rapidly reverse its policy of buying large amounts of dollars to maintain an undervalued exchange rate for its yuan currency.
- Any partial sale of their current dollar holdings, or even rumours of that, would drive down the value of China’s remaining dollar holdings, probably sharply; - Chinese sales of dollars would drive up the price of whatever currencies they converted into, adversely affecting China’s trade competitiveness and drawing protectionist reactions towards Beijing and; - China would be branded an ‘international pariah’ if it were to ‘dump’ its dollars in a ‘precipitous manner that generated global financial and economic instability.’
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