Tuesday, January 10, 2006

 

More Warnings From China About Reserve Policy

The Washington Post reports on the biggest currency story going. "China has resolved to shift some of its foreign exchange reserves, now in excess of $800 billion, away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday."

"The Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb."

"Stephen Green, senior economist with the bank Standard Chartered PLC in Shanghai, identified several signals that China is intent on limiting its exposure to the dollar, not least, a recent pledge from the State Administration of Foreign Exchange to 'actively explore more efficient use of our foreign exchange reserves.'"

"'We believe this adds to the downside pressure the U.S. dollar is currently facing,' Green wrote. 'It is the first official expression from SAFE that they are looking at switching away' from the dollar."

"The comments on SAFE's Web site reinforced earlier public warnings from Yu Yongding, an economist on the monetary policy committee of China's central bank, that the country's reserves are now vulnerable to a drop in the value of the dollar."

"Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences, sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets. 'It is thus extremely unlikely that China would do anything to harm its own balance sheet,' wrote Stephen Jen, an economist with Morgan Stanley."

"Warnings about an impending Chinese sell-off in dollars emerged in July, as China slightly altered the way it sets the value of its currency, the yuan, bumping it up against the dollar by about 2 percent. The move temporarily muted criticism on Capitol Hill from those who accuse China of currency manipulation."

"China sought to quash such talk. In September, a senior central bank official told a ballroom full of international executives gathered in Beijing that China would not sell significant quantities of U.S. bonds, cognizant that such a move would cause the price to plunge."

"Even if a Chinese shift away from the dollar weakened the currency, that would probably not soothe tensions with those in Washington calling for an increase in the value of the yuan to help U.S. manufacturers. Unless China severs the link between the value of its currency and the dollar, a move Beijing says could destabilize its economy, then a weaker dollar would simply mean a weaker yuan as well, leaving in place the current debate over whether China's export earnings are being netted unfairly."

Comments:
"Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences, sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets. 'It is thus extremely unlikely that China would do anything to harm its own balance sheet,' wrote Stephen Jen, an economist with Morgan Stanley."

I love these guys, trying to sugar coat and they really beleive the dollar will remiain the main cauurency, read thir comment above. Actually this is why the chinese are switching they can see the impending explosion about to happen to this countries economy, everyone tapped out, housing going to fry all this = no more spending = no more buying from China = a fall in their industry so either way its gonna happen and they know it. So it makes good sense to start looking at shifting some of their holdings befoe ir loses value.
 
That Mexican Peso CD paying 6% is starting to look better by the day...
 
Ben,

What do you recommend one does with their dollars, just buy metal?
 
Metro,
No, if you look back at earlier posts, I view gold as I would life insurance. An adequate amount is neccesary, but too much is a waste. Everyone must determine what that amount is, and maybe we should do a topic post on that one day. I prefer to diversify my liquid position into foriegn currencies, in interest bearing accounts.
 
thejdog,
It would take a lot more than 6% to get me into any latin american currency.
 
Ben,

Latin America yes, but the Peso has been relatively stable of late, though that might change with the upcoming elections and the possiblily of another leftist government in Mexico. That 6% return could be more like 20% if the dollar tanks. Still I'm nervous. I'm a real estate investor who is very concerned about the value of my USD assets depriciating rapidly. Might I ask what currencies you are currently in? Are they in a CD through Everbank?
 
thejdog,

I have used Everbank for about three years. I'm mostly in Swiss Francs, but the Swiss have been a huge disappointment as the central bank sold literally tons of gold and lowered rates.

There are basket CD's that allow you to stay in oil economy curriencies, for example. I am looking around for a stable alternative to the US dollar. I'm about 40% USD in my liquid stuff.

I don't like the prospects for the Peso. Increasingly, it looks like the US and maybe the world will undergo a recession and Mexico is completely reliant on cash sent there by immigrants here and in Canada. When that drys up, they will print money like they always do. Did you know Mexico is a net oil importer?

When I was a younger man, I used to play around with Costa Rican CD's that yielded 24%. That is what might get me to hold latin american paper.
 
Ben said,
"...I view gold as I would life insurance. An adequate amount is neccesary, but too much is a waste. Everyone must determine what that amount is..."

If you google the phrase "ounce of gold in the world" you get estimates of 2billion, 3b, 4b, 5b, and 6 billion on the first page of results. so, who knows.

but even going with the high estimate, with 6 billion people in the world, if you've got one ounce, you've got your share.
 
Normally I'd agree -- Gold is insurance. However, how often do you know (and I mean really know) the storm is coming and virtually no one else is covered?

OTOH, silver & uranium are just smart investments given the fundamentals.
 
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