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Brian D. Butler
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if you are interested in contributing see here
Is China becomming more Capitalistic?
No, argues a new report: http://www.economist.com/displaystory.cfm?story_id=12333103.
..."the "Shanghai model" that dominated the 1990s: rapid urban development that favoured massive state-owned enterprises and big foreign multinational companies. The countryside suffered. Indigenous entrepreneurs were starved of funds and strangled with red tape.
The Chinese currency is appreciating...(vs US dollar)
Since October 2007 (to Feb 2008), the currency is appreciating at an annual rate of 15%. But, will this continue? China is still unwilling to let the renminbi float freely, because it does not want to cede control of its economy to market forces. But, before October it was only allowed to rise at a steady annual rate of about 5 per cent a year.
pressure from Europe (is better than pressure from the US)
Some analysts suspect it is no coincidence that the pace of renminbi revaluation has increased markedly since November’s trip by a delegation of European officials to discuss currency issues in Beijing. Since the start of the meeting on November 26, the euro has dropped 6.3 per cent against the renminbi, reversing a trend of constant appreciation since July 2005. By seeming to acquiesce to European demands for a stronger renminbi, Beijing has avoided looking like it bowed to pressure from the US – politically a far more satisfactory position for China. “Clearly we speculate, but it could just be that the Europeans made a more palatable case for renminbi appreciation than their US counterparts could,”
Major Changes in China...and how they effect the global economy
In early 2008, we noticed some fundamental changes that were occurring in China, and began to wonder how they might affect global business patterns. In particular:
- Chinese currency is appreciating
- Inflation is getting too high
- Labor prices are ticking upwards
As we are seeing that inflation is ticking upwards, which is making many Chinese made goods more expensive. Also, the Chinese currency has appreciated and is expected to continue appreciating significantly. This will also make Chinese exports more expensive on the world market. This might have many significant effects on the world economy, from exporting inflation, to shifting global supply chains.
As the Chinese economy fights inflation, they have been forced to raise interest rates, which has attracted the desire of foreign investors to invest in China, which would have the effect of pushing the currency even higher, but China is desperately trying to maintain their system of capital controls. Will this delicate balance last? Will China slip into recession? If so, what does this mean for the global economy?
In China, where the currency is managed by the central bank, officials are dealing with a different dilemma: keeping growth solid and inflation contained by slowly allowing the yuan to strengthen. Government data there shows consumer inflation remains near an 11-year high. At a time when global growth is slowing and prices are rising, a strengthening currency can help protect consumers by boosting their buying power.
see more in our discussion about rising inflation worries 2008
How China (in the past) defended its currency (kept it low)
As China’s foreign exchange reserves have swelled to unforeseen and uncomfortable levels in recent years, Beijing’s policymakers have taken comfort in the thought that they are at least making a paper profit on managing the money.
To keep the renminbi stable, the People’s Bank of China buys nearly all the incoming foreign currency, invests it, and then tries to “sterilise” the monetary impact in China by issuing local currency bills to take the funds out of circulation. High interest rates in the US, and lower rates at home, meant that the dollars invested by Beijing in the US earned the central bank more than it was paying out in local currency bills.
Changes...
But the monetary policy cycles have now abruptly reversed. Rates are falling in the US but rising in China, where the government is tightening credit to fight inflation and cool some sectors of the economy. As a result, China’s central bank will be paying about 250 basis points more on the bills it issues at home than it gets on US Treasuries – a gap that grew with the US Federal Reserve’s cut on Wednesday.
Simple mathematics suggests that Beijing is losing billions of dollars as a result, an amount amplified if the impact of China’s appreciating currency is taken into account. Such losses, were they to be credibly tallied, could easily become a significant political issue in China, where there is perennial and often sharp-edged debate over policies blamed for a loss of state wealth. Hong Liang, Goldman Sachs China economist, calculates that China is losing about $4bn (€2.7bn, £2bn) a month on its “sterilisation” operations, with the trend accelerating because the reserves are still growing faster than gross domestic product. Brad Setser, of the US Council on Foreign Relations, said that if the losses were calculated on an “accrual basis, by counting them as you add to them rather than when you realise them”, the shortfall would be even higher, equal to about 5 per cent GDP
Perhaps more important is the potentially far-reaching impact on policymaking of losses on the “sterilisation” operations of the central bank.
South Korea had the same problem...
“For example, the Korean central bank threw in the towel and allowed significant appreciation [of the currency] after they started incurring substantial losses on their sterilisation operations,” he said.
Social Control is Job #1 in China
Inflation concerns in China relate primarily to their impact on social stability rather than stemming from more academic concerns about whether the economy might be operating above potential. “Social stability, as we are constantly reminded when visiting the mainland, is always the number one issue when making policy in China,” There were rumours of rioting during the recent cold snap, while three shoppers died in November in a stampede to buy discounted rapeseed oil.
For China to control inflation, it will either have to risk social unrest by tightening its administrative grip and grinding domestic demand growth into the ground or allow the renminbi to appreciate at a quicker pace. “If Beijing does not want to accept inflation moving into double figures it has two alternatives: hammer domestic demand and risk riots in the Olympics, or let the renminbi go up faster.”
But, just as rising prices could threaten unrest, so too could an economic slowdown. A large appreciation of the currency could hurt the areas of the economy that Chinese authorities are afraid to anger. "Spreading the benefits of progress to those in the countryside and those working in low margin industries remains an important policy objective,” says Mr Yetsanga.
“Large and sustained exchange rate moves are still expected to have a disproportionate and negative impact on these areas.”
Implications.... currency will appreciate, and export growth will slow
The renminbi has started to appreciate more rapidly in recent months, rising at an annualised rate of about 20 per cent, compared with 6-7 per cent over the whole of 2007. In the short-term, the Fed’s recent cuts seem likely to delay much expected rate rises by the PBoC, perhaps to as late as April. In the longer-term, say economists, China will have no choice but to allow its currency to appreciate faster, even in the face of entrenched domestic resistance, and at the very point at which its export growth has started to slow
Energy subsidies are changing:
see our discussion on China and energy markets
Asset bubbles in China
As we have seen in the US: too much cheap money in a system leads to asset bubbles (think internet bubble, housing bubble, commodity bubble?). But, the situatin in China is even more exaggerated. The ordinary person has no options for where to put their money to save for retirement. There is the official savings account which offers some 1-3%, and thats it. But, then, these Chinese can also invest in (a) the stock market...which has gone up, and up, and up....or (2) real estate...and we've seen buildings go up, and up, and up. China has massive speculative bubbles in 2007 in both the stock market and in real estate. Will they eventually pop? continue going up (and defying gravity)? What happens if Chinese suddenly are given other options for where to invest their money (for retirement)? would money suddenly flood out of these two markets? This is really something to keep a close eye on....
Will China continue to support US Treasuries?
note: China buys more U.S. assets than U.S. goods, likely accounting for a lot of China ’s stunning reserve growth in January and February 2008.
US treasury bond yields could shoot up (making it much more expensive to borrow money in the US).
In addition, the Chinese look to be slowing down their purchase of US Treasury bonds (which they were doing to keep their currency down).
But, the biggest impact could be sharply higher bond yields in the US (as our government must price bonds at a higher price to attract other investors, now that they cant just count on Chinese demand for our bonds). Higher bond prices would mean more expensive money. It would make it more expensive for our government to borrow money (to pay off the budget deficit)...so borrowing costs for all Americans would go up. Mortgages, etc...all more expensive.
How will this effect the US? How dependent is the US on Chinese capital to fund its current-account in balance? (remember, the US has a massive current account deficit, but has traditionally had a capital account surplus....thanks in large part to the inflow of Chinese capital). If the Chinese stop sending their excess capital to the US, will other countries pickup the slack? Or, will the US be forced to cut the current account deficit (which should happen if the US dollar continues to weaken)....
Is this the end of cheap capital in the US? If so, that would mean consumer credit would be more expensive, so credit cards, car financing, house financing could all get more expensive. Could this be the end of the strong consumer market in the US? geez, i hope not! Only time will tell....
As China shifts away from Treasuries, and focus on strategic investments...
The US and Europe have been constantly pushing China to revalue its curency upwards, and it appears as if it finally has (see discussion below). This is a major, world-changing event (that has happened quietly). The results are that China has responded to US pressure, and has stopped buying up US treasuries, and has started up a sovereign wealth fund to invest in riskier investments (now, we are worried about that !).
Look at the following graph...and see teh dark blue line...thats the trend of Chinese purchases of US Treasury bonds. Is this the beginning of a downward trend? or just a mild dip?
net Chinese purchases of US assets now are probably around 3% of US GDP, and that is all a state flow
History of this trend...
In the past, the US was able to borrow money for really cheap because countries like China Asian countries fight to keep their currencies undervalued vs the dollar
This trend of countries in Asia fighting to keep their currencies undervalued has had major impact on the world economy. China, is of course the major country that comes to mind, but others are doing the same thing.
In order to keep exports competitive, the Asian governments do their best to keep the currency undervalued. But, with massive amounts of foreign capital coming into the country, these governments are forced to spend that money overseas. See our discussion on the balance of payments and the Mundell trilemma to see why this is.
But the result of the situation is that countries like China are forced to invest most of that money overseas, and most of which pours into US T-bills. As they buy up US debt, that helps keep the US borrowing costs to a minimum, so the Fed is able to keep interest rates extremely low. This is partly to blame for the asset bubble in housing, and the subsequent credit crisis of 2007.
The bigger fear, however, is what would happen to the US economy if China were to suddenly stop buying up all that US debt. If China were to stop supporting the weak currency by purchasing US debt, then the US would be forced to a balance of payments crisis, unless it would significantly cut back on imports, or expand exports.
For this reason, I suspect that many in Washington secretly are welcoming a weaker US dollar which should help to slowly correct the balance of payments issue (before confronting the Chinese to allow their currency to appreciate).
Many American politicians and economists talk as if the yuan was still fixed against the dollar. Yet on current trends, by the time the next president enters the White House the yuan could have appreciated almost 27% since 2005.
Since the beginning of October the yuan has climbed at an annual rate of 13% against the dollar—its fastest pace since China stopped pegging to the dollar in July 2005 (see chart). Since 2005 it has appreciated by a total of 14%. The offshore forward market is pricing in another 8% increase over the next 12 months; several economists are betting on a rise of 10% or more.
It may appear as if Beijing has caved in to Washington's demands. But the main reason why China is allowing the yuan to rise faster is because its policymakers believe the benefits to China from a rising currency now outweigh the costs.
Beijing's top concern today is inflation, which rose to 6.9% in November. On January 9th the government announced tighter price controls on a range of products. The People's Bank of China (PBOC) increased interest rates six times in 2007, but this is unlikely to squeeze inflation, which has been driven largely by a end of cheap food caused by supply-side shocks. A faster pace of currency appreciation offers a more powerful weapon: it will help to reduce imported inflation, especially of food and raw materials.
By reducing the need to intervene to hold down the currency, it will also curb the build-up of foreign-exchange reserves and hence monetary growth
Another reason for the shift in policy is that the costs of holding down the yuan are rising. The PBOC has so far succeeded in “sterilising” most foreign-exchange inflows—printing yuan to buy incoming dollars and then selling bonds to banks in order to mop up the resulting excess liquidity. It has even made a profit on this activity, because the return on its dollar reserves exceeded the rate it paid out on sterilisation bonds. Now, however, the PBOC is losing money.
Thanks to falling interest rates in America and rising rates in China, Chinese rates are now higher than those in America and the gap is likely to widen this year. Since the shrinking yuan value of China's dollar reserves also has to be reported as a loss, the cost of currency intervention is higher still.
Predicted new trend:
Higher yields in China than in America are also likely to mean bigger inflows of foreign capital. The PBOC would then have to buy even more foreign exchange to hold down the yuan, increasing the required amount of sterilisation. On January 3rd the one-year dollar LIBOR rate (the cost of funding a carry trade using dollars) fell below the Chinese one-year deposit rate for the first time since China abandoned the dollar peg. Add in the expected appreciation over the next year, and investing in yuan is highly attractive.
China's capital controls give it some protection from speculative inflows, but they are leaky. Businesses can build up positions in yuan by over-invoicing exports and under-invoicing imports. Some economists argue that a big one-off revaluation would help to stem inflows by reducing the expected future appreciation of the yuan. But Chinese policymakers have stressed the need for gradual adjustment. To show that the currency is not just a one-way bet, the PBOC may try to nudge the yuan a bit lower in coming days.
The problem with China's appreciation by stealth is that it gets no credit from its critics for doing so. If China had delivered the past two years' currency appreciation in one go it might now be getting less flak from its detractors in America.
Inflation in China - getting out of control?
Chinese inflation climbed to 7.1% in January, the highest in 11 years. Food prices still account for the lion’s share of consumer price rises, but rising producer prices indicate that more inflationary pressures may be in the pipeline. So far China has relied on price controls and lending curbs in its inflation fighting, but money and loan growth reaccelerated in January. With increases in prices of a broader group of inputs, China could now be exporting inflation not deflation. See “How Should China Respond to Inflationary Pressures?”, “Chinese Inflation Dynamics: How Much Will Be Passed On to Export Prices?” and “Impact of Globalization on Inflation: The Chinese Effect”
Note: Chinese food inflation is NOT caused by the US ethanol policy!!
In spite of what most jouralists would have you believe, the US policy of Ethanol for fuel is NOT causing grain prices in China to rise. In fact, China is seeing inflation in food prices but the root cause is NOT the US ethanol policy. This is because China produces 95% of all the grain it uses inside of China itself.
Per the Economist EIU:
"Rising inflation has become the main concern of economic policymakers in China after the year-on-year rate reached 8.7% in February—the fastest rate in 11 years. Although the surge in February was mostly related to the bad weather in that month, and inflation fell back slightly in March, to 8.3%, prices have been on a strong upward trend since mid-2007, owing mostly to higher food costs, and in particular higher pork prices. The year-on-year rate of inflation should fall rapidly in the second half of the year, primarily because of the cyclical fall in pork prices from the high base in 2007, helped by a restocking of China's pig herds. However, surging global food prices are likely to mean that the deceleration in inflation will not be as swift or deep as we previously expected. We have consequently increased our inflation forecast for 2008 to 5.9% (from 5% last month). Short-term grain price inflation remains to a large extent dependent on the weather, and there is a risk that a major drought in China could send prices accelerating rapidly. In the longer term, a falling supply of agricultural land, water shortages and rising fuel and fertiliser costs will put upward pressure on food prices. However, inflation in the cost of manufactures will remain low, owing to intense competition and massive investment. If inflation eases as expected later in 2008, the government will push through utility and fuel price rises, which will boost producer prices further and put a floor under inflation rates. Inflation should slow further in 2009, averaging 3.6%, owing to improving agricultural supply."
Inflation in manufacturing goods (important for exports)
Chinese Toy industry
Costs are rising fast and a series of product recalls
Costs are rising in other areas, too. The high oil prices makes rubber and plastic more expensive. The commodities boom has increased the prices of wood and metals.
But by far the greatest worry is China's tightening labour market. Labour costs are up 30-35% since last year, according to Jeffrey Lam, a member of Hong Kong's legislature who runs a toymaking company and is an adviser to the territory's local trade group. Wages are up by 10-15%, he says, and a new labour-protection law that came into effect on January 1st increases costs by the same amount again.
The yuan, China's currency, is appreciating. Even with higher pay, factories are short of workers, so costs seem likely to rise further. “Everyone should be aware”, says Mr Lam, “that China has changed.”
Womens Shoes
women's shoes—an industry that, alongside toymaking, has been critical to the economic growth of southern China. When a large American retail chain recently sought to order some shoes for April it was asked to pay 20% more than the quote it received in October for delivery next month. Conditions, the buyer concluded, are “ugly”.
Shifting Supply Chains
there are murmurings that many factories in southern China will have to close this year. Manufacturers are looking for alternative locations. Moving inland is possible, but infrastructure is a concern; Vietnam is another possibility, but land and labour costs are rising there as well.
Falling Shipping Prices - not a good sign!
The only price that is falling, and so far only to a few locations, is for shipping. In part that is because there are more ships, but it may also suggest that demand is softening, which is hardly encouraging.
see more in our discussion about rising inflation worries 2008
Foreign Reserves
China is by some distance the world's largest holder of foreign-exchange reserves. Its currency hoard passed the $1.5 trillion mark at the end of last year, little more than a year after it reached $1 trillion. China's swollen reserves reflect its current-account surpluses and its exchange-rate policy. Its central bank has bought huge quantities of foreign currency to stop the yuan from rising too quickly. Many other Asian economies have adopted a similar plan. Japan built most of its stockpile earlier in the decade, when it intervened in currency markets to keep the yen weak.
China Becomes A Net Seller Of US Treasuries
20 June 2007
There is a general fear across global financial markets that the world will withdraw its support for the US dollar. Since the greenback replaced gold as the global reserve currency in 1971, the preferred safe haven for central bankers and private investors alike has been in US dollar investments, particularly government-issued Treasury bonds. However, the US has been building, year upon year, a significant current account deficit. This means the US is the world's largest net debtor. The US has then used its debt to support its consumption, which is aided by a dollar with sufficient purchasing power.
While the two largest offsets to the US deficit are Germany and Japan, China has been the rapidly rising contributor. The US has lapped up cheap imports from China, while China has balanced its receipts by investing them into US Treasuries. The result is that US bond yields have remained low through strong demand, and the US dollar has held its ground.
The problem is that China has enjoyed a booming export economy because it is providing the finance to do so. It is akin to lending a customer the money to buy goods, and then lending more money to buy more goods, until it is clear that turning off the credit tap would only mean losing the most valuable customer. It would be an internecine decision.
Both the US and Europe are putting China under pressure to allow its currency to revalue to a level that better reflects China's booming economic growth. To do so, however, would mean Chinese exports would be more expensive, thus reducing demand, and China's holding of US dollar assets would be worth less. This is a lose-lose that China clearly would like to avoid, but to carry on regardless while US debt steadily builds is only to face an inevitable swift and destructive correction some time in the future.
China recognises that its fortunes are heavily dependent on its overweighting in US dollar assets. Hence it has decided this year to begin quietly diversifying away from US Treasuries in order to both diversify its risk and to obtain greater returns from other currencies and asset classes. When this was announced there was an initial scare that US bond prices would collapse (yields shoot up) as China withdrew its support, but these fears were unfounded as China was only ever going to adopt a softly-softly approach.
US bond yields have, however, jumped markedly this month, putting somewhat of a frightener through markets. What was the cause? The most popular reason is expectations of growing global inflation. With food prices pushing higher, oil prices pushing higher, and commodity prices soaring ever higher, it stands to reason that China, and other producers, must at some point pass those price rises on, resulting in higher inflation. But even the most recent US evidence suggests inflation is well under control.
Another potential reason is the withdrawal of support for US Treasuries. China is not the only nation overtly diversifying away from the US dollar and into the euro, gold, other commodities or equity markets. In the case of China, however, it seemed for a long time there was a lot of talk and little action.
The US Treasury last week released its Treasury International Capital (TIC) flow data. This measures longer term movements into and out of US dollar assets. Because of the long term nature, the latest figures were only those for April, now a month and a half old. While US bond yields have been ticking up for a while, it was only earlier this month when the real jump came as rates broke through 5%.
Nevertheless, the data showed that China had indeed become net sellers of US Treasuries for the first time since October 2005. China net sold a value of US$5.8 billion, which brought the extent of its holdings down to US$414 billion. This doesn't seem like much, but as the consultants at GaveKal point out this does not mean it is insignificant.
Firstly, given bond price movements in May-June it is fair to assume China has continued to be a net seller. Secondly, China does not only hold US Treasury bonds but also US thirty-year mortgage bonds. These have also jumped 60 basis points in yield in the last three weeks, so perhaps China is also divesting of these assets as well. Thirdly, the data finally show that China is making good on its intentions to commit US$200-300 billion to higher risk/higher return investments.
Both China and Europe have been pushing China to revalue its currency more rapidly. As a result of an artificially low renminbi, export industries across the globe are finding it hard to compete, threatening their own economies. It may well be, suggests GaveKal, that China is letting the world know that a sharp revaluation of the renminbi will surely result in sharply higher US bond yields, and that's no good for anyone. Softly-softly however is a safer approach.
GaveKal believes we have 'turned a corner on [global] interest rates'. However, the encouraging news is that world stock markets have held up. The strength of the bull market is 'very impressive', particularly in Asia.
The release of the TIC data, and the revelation that China has become at net seller, should have put the wind up financial markets once more, but it didn't. It didn't because despite Chinese movements, foreign flows into US dollar assets in April were nevertheless net positive - to the tune of US$84.1 billion, up from US$58.5 billion in March. A total of US$97.4 billion of foreign money flowed into the US, while a total of only US$13.3 billion flowed out of the US into foreign investments.
Thus there appears little to worry about. The US dollar is being supported globally and bond yields have now fallen back to as low as 5.09% last night from their peak of 5.30% last week. Stock markets have reacted accordingly.
Morgan Stanley suggests that the data confirms the rise in US bond yields is not just about a 'buyers' strike' of US Treasury investors (although we're yet to learn about May and June). Given inflation fears have been somewhat muted by recent CPI data, this is supposedly no reason to be selling bonds either.
Morgan Stanley also makes the observation that while foreigners may be investing more in the US than the US is investing offshore, thus making the US a net debtor, the US is accruing much better returns on their foreign investments (11.5%) than vice versa (6.4%). Thus the US continues to record a surplus on net investment income.
Add this to the argument from GaveKal that there is little to worry in regards to the US deficit while it is US companies receiving all the profits from their foreign outsourcing, and it seems that ongoing fears about the US current account deficit will remain as just that - fears - for a while yet.
China's investment fund will have widespread effects Country has amassed $1 trillion in foreign currency reserves, mostly U.S. Treasuries.
10 March 2007
BEIJING
China soon will create one of the world's largest investment funds, with ramifications for global stock, bond and commodities markets, and for how the United States finances its trade deficits.
Finance Minister Jin Renqing said on Friday that the aim is to make more-profitable use of its $1 trillion in foreign currency reserves, which have piled up as it posted huge trade surpluses year after year. Most of the funds are parked in safe, but relatively low-yielding U.S. Treasury securities and other dollar-denominated assets.
Jin said Beijing may follow the lead of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. It owns stakes in Singapore Airlines and Singapore Telecom, as well as in banks, real estate, shipping, energy and other industries in India, China, South Korea and elsewhere.
Economists have suggested Beijing might allocate as much as $200 billion to $400 billion to the new company, which in a single move could create one of the world's wealthiest investment funds.
"They want to be more aggressive than what they do with current reserves," said economist Mingchun Sun at Lehman Brothers in Hong Kong.
"They could invest in higher-yield products - stocks, corporate bonds, maybe even commodities," Sun said. "Basically, the returns would be higher because the risk is higher."
A shift in China's investment strategy could change its purchases of Treasuries, affecting a market that Washington relies on to help finance multibillion-dollar budget deficits, and perhaps eventually push up U.S. interest rates.
But Lehman Brothers' Sun played down that risk. He said that with its reserves growing by as much as $20 billion a month, Beijing could afford to keep buying U.S. government bonds while also channeling billions into new investments.
Jin gave no details of how the Cabinet-level company might invest the reserves, nor did he say what portion of the reserves might be channeled through the company or when it would start to operate.
Spokespeople for Jin's ministry and the central bank and foreign currency regulator declined to give any other details.
Chinese economists and media reports have suggested China might adopt more unusual investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs in order to encourage Chinese consumers to spend more and reduce dependence on exports.
The growth in China's reserves is driven by the rapid growth of its exports, which brings in dollars, euros and other foreign currency, and by the billions of investment dollars being poured into the country.
The surge in money flooding in from abroad forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.
The precise composition of China's foreign currency reserves is a secret. But economists believe that as much as 75 percent is believed to be in U.S. dollar-denominated instruments, mostly Treasuries, with the rest in euros and a small amount in yen.
China's U.S. Treasuries Investment May Decline: Currency Expert
296 words
3 July 2007
English
TOKYO (Nikkei)--The Chinese government's investment in U.S. Treasuries is likely to decline from now on, currency expert Huang Zemin told The Nikkei in a recent interview.
China plans to set up an investment management company to oversee the nation's foreign exchange reserves, the world's largest. As a result, many observers are shifting their attention to how the investment company decides to invest the funds.
China's foreign currency reserves, which have risen to 1.2 trillion dollars, need to be managed in an efficient manner, says Huang, who is head of the International Finance Institute of East China Normal University.
At the same time, the euro's market value is rising. But from the perspective of security and profitability, the value does not necessarily correspond to the market's size, he says.
The new investment company is likely to be state-run, with a vice-minister level official to be installed as president, according to Huang.
Because it would be state-owned, whether the company will employ an internal oversight structure similar to that in Singapore needs to be worked out, he adds.
When asked about how the company would invest funds, Huang explained that the government would first issue special bonds. Resulting proceeds would be used to buy foreign currency held by the People's Bank of China. Bond offerings would also act to absorb yuan released to the market in currency interventions, he said.
Huang expects the foreign currency reserves to be invested in financial assets such as overseas bonds and investment funds. While some are urging investment in natural resource development and other strategic vehicles, that possibility may be nil, according to Huang.
Traders: What Will China Buy In US Treasuries After T-Bills?
687 words
24 May 2007
12:11 PM
English
--With China Mainly Quiet, Two-Way Risk Roils U.S. Treasuries
--One Trader: 'They Can't Keep Muscling the Market'
--One Trader: Chinese 'Don't Normally Stay Out That Long'
By Sheila Mullan
NEW YORK, May 24 (MNI) - Traders will be watching closely to see
what China's next move is in the U.S. Treasuries market, said sources,
who cited brisk T-bill buying in Treasuries since May 10, but then
muted action in recent days.
The question is very important in the U.S. Treasuries market as
China often is a buyer at the market lows, thus in its absence, the
market had suffered quite a selloff, said traders.
China is the No. 2 buyer of U.S. Treasuries with $420 billion in
its holdings as of the latest March-end U.S. Treasury data. (Only Japan
holds more Treasuries at $612.3 billion.)
Traders still watched to see how long China will hold onto its
recent T-bill purchases acquired in recent 6-month T-bill auctions,
including those T-bills maturing in the Oct. 11 to Nov. 1, 2007 time
zone.
Some will be watching closely to see when those T-bills lose their
bid, as they would think that China would move out the curve to
intermediates, unless China would be embarking on a whole new different
strategy to hang out in the front end.
"They are going to cool their jets for a while," quipped one
trader Thursday. "They may wait for the non-farm payrolls. After all,
the market is going their way" in terms of reaching higher yields.
"We will have to see where the new money goes," said the trader.
"They still hold what (bills) they had."
On Wednesday, there had been some talk that there had been some
light Chinese buying earlier in older 10-year notes and in 2-year notes.
Some had expected an intermediate Treasuries bid from China later this
week once U.S.-Chinese talks wrapped up midweek.
As there had been good buying from China in the T-bill sector that
began May 10, some wondered if they might move out the curve
now, and so watched for signs of that, but as of Thursday afternoon,
China bill holdings appeared intact so far with no other talk of Chinese
action.
Chinese buyers "don't normally stay out that long," said one
trader. "They had been buyers in the 5-year to 10-year part of the curve
for the longest time."
China official Wu Yi had said in remarks in D.C. on Wednesday that
the U.S.-China Strategic Economic Dialogue was a success, and had
addressed hot button issues, and paved the way for future bilateral
cooperation.
But some in the Treasuries market were less optimistic. "With
Paulson and Wu, the war is still on," said one trader. "This is a bigger
political thing, in my mind: this is a policy war. We are forcing them
to do something" in terms of currency revaluation "that they do not
want to do. This is a war of the wills."
But one trader at least said with China deemed inactive, and thus
not shoring up the market on selloffs with buying, that the market now
had two-way risk.
"From a roundabout way, I think this is great for the market as it
will allow us to get more volatility into it," said the trader. China is
"actually the 800-pound gorilla that sits in the room: if you wanted to
short it (normally), you could not. But, now you can. They can't keep
muscling the market. I think eventually they had to stop pushing (U.S.)
rates down."
One trader admitted he had no idea what would be next on the
Chinese plans for Treasuries and wished he knew. "That is the
multi-billion-dollar question," he said.
Subprime crisis in the US, and what its effect is on China
Interestingly, the subprime lending crisis in the US, and the ensuing credit crisis has given the Chinese another excuse to avoid opening up their financial market to Western banks. This is a shame for two reasons, (1) it would benefit the chinese consumers, and (2) Western governments want to open up China to capitalism and their banks in exchange for opening up their markets to Chinese products
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