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Thursday, August 21, 2008

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bsetser

Why is more research needed to explain China's extraordinary (even by Asian standards) level of reserves? Isn't the answer rather obvious?

I am a bit skeptical of ongoing efforts to define the optimal level of reserves up; Jeanne and Rancierre had a very good paper a few years back that argued that most emerging markets need around 10%, and that made sense to me. but there is no plausible explanation for why china -- with a $4 trillion economy -- needs around $2.3 trillion in reserves and similar assets (a ton of fx has been stuffed in the state banks) for precautionary reasons. its still most closed capital account (and limited associated risks of a big withdrawal of foreign funds) argues for less not more reserves than the asian norm.

Blissex

As someone summarized it, it is a form of vendor financing: the Chinese government is financing the purchase of Chinese goods by keeping other currencies high. It is actually more than vendor financing of its products, because lending money to the USA at way negative interest rates is a deliberate subsidy by the Chinese Communist Party to the policies that benefit the USA Republican Party. Who has financed at way negative real interest rates the past decades of tax cuts for the rich, the Iraq war, the real estate bubble? The Chinese and Saudi governments to a large extent. Why would they? But to get political favours from the USA elites. For the Saudis it is to buy favours from the political elite, and for the Chinese is to buy favours from the business elite. In effect the Chinese Communist Party and the USA business elite who own the Republican Party have a common enemy: USA workers, whose jobs should go to chinese workers to help keep CCP support high enough, and to make more profits for the USA business elites. The CCP have therefore adopted a vendor-financing policy that incentivizes the USA business elite to move their capital and jobs to China, and rewards their political arm with very low federal funds rates.

nick

One of the factor 1997 Asian currency crisis is about foreign investors take money back from the country.

Olga Lednichenko

Perhaps the reasons are mostly Political. Its like giving assurance to the public-the government is on top of things. Most people on the main Street don't understand concepts such as opportunity cost -let alone figuring out various morphs of Capital. Most,however,do understand a hefty reserve with a Lock on it -for insurance and emergency purposes.

Regards
Olga Lednichenko

albertjames

Empirical analysis does not suggest that reserves are too high in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption.
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Mia

However, Asia still rely a lot on the westerners' in economy. It is a mutual relationship between us. Look at the economic downpour right now, all are affected. But, it is good to see that China has finally open up to the world!

Doug Wolkon

You can't opine on the level of reserves without analyzing the type of currency(s) in which the reserves are held. Its like a "risk-free" money market account backed by Lehman Brothers bonds. It may look like a lot one day, but we have learned the hard way that its never enough.

For example, say if at the same time investors continue to pull capital from China, hyper-inflation of the dollar kicks in. Such a scenario is certainly a possibility given all the bad assets (i.e. Fannie and Freddie, AIG, Bear Stearns) the U.S. government has acquired by increasing its money supply. In other words, who in their right mind is really going to want dollars.

In such a scenario such great reserves of emerging Asia may not seem so great. You can certainly imagine western investors continuing to pull capital from countries like China, Russia and those in the Middle East in order to cover billions of dollars of losses at home. Those countries like China will have no choice but to sell dollars in order to protect their own turf of fleeing investors.

Such reactions will only add to the total supply of U.S. dollars on the market, creating the perfect storm for further hyper-inflation of the dollar until such one-time bloated reserves are worth the Bear Stearns and AIG paper they were printed on.

Andrew Knight

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Danny L. McDaniel

When is enough too high before the United States becomes it become a fully owned subsidary of the Peoples Republic of China? They are the factory floor of the world and we have become the Dollar Store for China.

Danny L. McDaniel
Lafayette, Indiana

Rodrigo the emerging economist

Glenn Maguire, Asia Chief Economist at Societe Generale, has just published a paper that analyses how China's domestic (infrastructure) led growth model will inevitably see China move into trade deficit. FX reserve accumulation slows, if not reverses!!!! BOND SHOCK !!!! non-china asia players will have to pick up the short fall or domestic players - end game - higher real yields in the US

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I think you are ignoring the potential for domestic consumption growth in the BRIC (and other) countries. Also, trade between the countries hasn't ceased, it has just dropped. The currently level of trade, while reduced almost to 10 year lows, will still offer enough to fund emerging markets, even if just at a slower pace.

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I think there is a clear case for a separation of currencies versus reserves.The role international currencies should play is transactions. In this regard, it will be difficult to make a currency which is not widely used in the real world, such as special drawing rights, to be used as an international currency.

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