The smiling Chinese Olympic face is gone - now let's talk about our dollar reserves

Good article in the NYT http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html about the potential need for a capital infusion for the People's Bank of China. Their dollar reserves which have been building to over $1 trillion have been losing money. This is what happens when the global capital markets are supposed to eliminate the saving imbalance problem. The yuan is supposed to appreciate, rates in the US are supposed to rise and the imbalances should be reduced. Unfortunately, this type of realignment of currencies has costs. The dollar reserves will decline in value as the yuan appreciates and interest rates rise whether caused from increasing credit risk or expected inflation. This will lead to declines in portfolio values. Capital needs to be raised and it is natural that the holders of these assets will start to complain.

There was no complaining before the Olympics but now we are in the new reality of global finance. The Chinese economy is slowing, their stock market has been falling, and there is less desire to face the cost of a rising yuan.