Sunday, 5 October 2008
China, Cooperating with the $700 billion Bailout, to Lend More to the US?
The People’s Bank of China (PBoC), China’s central bank, has welcomed the recent passage and signing into law of the $700 billion Wall Street rescue plan by the US government, stating that China and the United States have common interests in the stability of the financial markets, and that the Chinese side is willing to work with the United States to strengthen coordination and cooperation.
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China, Cooperating with the $700 billion Bailout, to Lend More to the US?
5 October 2008
The People’s Bank of China (PBoC), China’s central bank, has welcomed the recent passage and signing into law of the $700 billion Wall Street rescue plan by the US government, stating that China and the United States have common interests in the stability of the financial markets, and that the Chinese side is willing to work with the United States to strengthen coordination and cooperation.
However, the central bank has not said how it plans to cooperate with the United States. It is expected that the US government will raise this sum of money through government bonds issue. It may set up a fund management company, buying toxic mortgage-backed securities through reverse auction.
Almost any operation by the US government in the turmoil of the financial markets will be faced with contradiction. On the one hand, it is to be hoped (particularly by taxpayers) that the billions of dollars worth of banks’ distressed financial assets sucking the industry down into the maelstrom can be acquired at the lowest price, but such low prices would necessitate those banks being rescued and recapitalized. And if an asset management company is set up, who is to run it? The billions of dollars in management fees it will earn will flow right back into Wall Street and the possibilities for conflict of interest would be rife.
PBoC has not said how it intends to strengthen coordination and cooperation with the US, but it is almost a certainty that China will continue to accumulate US government bonds, which touches a sore spot in China – should China continue to lend money to the US – this time to help save Wall Street?
Many analysts believe that this relief plan will weaken the dollar in the long-term, resulting in a further depreciation of the nearly $2 trillion worth of foreign exchange reserves held by Beijing. But in the short term, it is feared the financial crisis may trigger a global recession, bringing even greater loss to China’s dollar-denominated assets.
But most importantly for China is to guarantee the health of economy and the stability of its own financial system. Recently, a spokesman for People’s Bank of China said, “China’s financial system is sound and safe, and we are full of confidence in China’s economic development and financial stability.”
The spokesman went on to say that “the government has always kept a close watch on the development of the U.S. financial crisis and its impact. Recently, the ‘Emergency Economic Stabilization Act of 2008’ put forward by the U.S. government has become the focus of attention around the world. We are pleased to see the successful passage of this bill by Senate and House of Representatives despite the twists and turns. We hope that this bill can be implemented as soon as possible and affect positive results, in order to stabilize the U.S. and global financial markets and restore investor confidence. China and the United States share common interests in stability in financial markets. China is willing to strengthen coordination and cooperation with the US, and also hopes that countries around the world can work together to overcome difficulties and make joint efforts to safeguard the stability of international financial market.”
As far as China’s economy is concerned, the spokesman stated, “So far this year, in the face of many negative factors at home and abroad, China has maintained stable and rapid economic development. In general, the fundamentals of economic development of China have not changed and the economy continues developing towards the expected macroeconomic direction of sustaining substantial growth potential. China’s financial reform has made significant progress. Joint-stock reform of state-owned commercial banks has achieved significant result while small and medium-sized financial institutions have improved management mechanisms. Regulatory departments enhance prudent supervision in general. Profitability and risk management ability of financial institutions increase and the market liquidity is abundant on the whole. All in all, China’s financial system is sound and safe.”
He also said that in order to avoid or reduce the impact of the US financial crisis on China, the People’s Bank and other regulators have drawn up various plans. Regulators will continue to strengthen the prudential supervision and services to financial institutions, to urge financial institutions to strengthen their own risk management, and to safeguard the normal order of the capital market. PBoC will also continue to work with central banks of other countries and international financial organizations to better weather the financial crisis together. “We are confident that we have the ability to safeguard China’s economic development and financial stability, and contribute to steady economic development of the world.”
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