A good friend of mine just told me that 24 months ago, the Chinese ( who take in our dollars for the manufactured goods that they sell to the U.S. ) purchased an amount of dollar denominated investible assets ( U.S. Treasuries ) at a rate of 76%. He now says that this rate has plummeted to 24%. The Chinese Renminbi has been pegged at roughly 8.28 to the dollar since 1995 and, by now, is clearly undervalued, perhaps by as much as 40 percent due to China using its massive reserves to buy dollars. Many would argue that it is only China's "artificial" involvement, using its reserves to buy dollars and US Treasury bonds ( conveniently helping to finance the US budget deficit as well as the current account deficit ) that can keep the renminbi from breaking free of its peg. But can a floating Renminbi based on a basket of currencies be too far off? Will this lead to an even weaker dollar? Will China's fragile banking system be able to handle this? Could it lead to large purchases of gold? Any thoughts?
It is a very interesting question. I would assume it would depend on China's internal condition (interest rates, current account, GDP, etc) and application of the good ole Quantity Theory...... I have no idea what the internal condition of China is. Does anyone have any links that provide any data on China's economy? If I remember correctly, their inflation is like .3% annually, and I'd assume their interest rates are quite low as well. If their interest rates increase too much I'd think that may possibly trigger some more dollar drops, and could cause liquidation of US assets if it drops too far. A floating currency might put them in the same boat as Japan ( lots of US assets and a currency that wants to strengthen). My macro theory is a little rustyand I don't know much about China's economy. Any analysts out there? P.S. Great thread waggie.
Andy Xie writes about China. Check in (update daily during weekdays) http://www.morganstanley.com/GEFdata/digests/latest-digest.html
My guess is "NO". Their financial and banking systems have too many problems: corruption, bad loans, etc. Few weeks ago, China used up $45 billions of their foreign reserve to bail out two local banks. http://timesofindia.indiatimes.com/articleshow/415711.cms One of my friends' uncle is a general in China. According to him, several riots have occurred in the past one year. As usual, they have been suppressed silently by force.
G7 Says Currency Volatility a Growth Risk Saturday February 7, 7:08 pm ET By Brian Love and Luca Trogni BOCA RATON, Fla. (Reuters) - Finance officials from the world's top economies on Saturday overcame tensions sparked by the U.S. dollar's steep fall to warn markets that "excess volatility" in exchange rates could damage the world economy. ADVERTISEMENT The inclusion of this wording in a statement issued after a meeting of the Group of Seven finance ministers and central bankers seemed a nod to European worries that the euro's recent rise to record levels against the dollar could imperil its export-led recovery. "We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rate markets are undesirable for economic growth," the communique said. The statement came at the close of a meeting of G7 financial leaders -- from Canada, the United States, the U.K., France, Italy, Japan and Germany -- in Boca Raton, Florida. "The G7 statement speaks for itself," European Central Bank President Jean-Claude Trichet told reporters after the meeting. "This reflects the consensus of all participants in that meeting." In a thinly veiled reference to Asian countries that peg their currencies to the dollar, like booming China, the statement called for greater flexibility in exchange rates of nations where flexibility was limited. "The various currencies that are not flexible will recognize themselves," Trichet said. "There is not only one, there are quite a few." This wording was similar to that included in the statement that came out after their last meeting, in Dubai last September, but officials said the new language should clarify for currency markets which countries they are admonishing. "We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," the statement issued on Saturday said. It also noted that while the global economic recovery had gathered pace, that pace was uneven and countries needed to redouble their efforts to boost growth. The officials also wagged a finger at Argentina, urging it in the statement to "engage constructively" with creditors and live up to its pledges to multilateral lenders. A number of G7 officials have expressed frustration at Argentina's slow progress in talks with private bondholders aimed at restructuring $88 billion in defaulted debt. Buenos Aires has held fast to its offer, made in Dubai last year, of 25 cents on every dollar of nominal debt.
not concerned with China backing away from purchases of US Treasury Bonds. Says that this is not of any major significance. Interesting.