China has $3 billion in foreign exchange reserves with 2/3 likely in dollars. There is a going concern that the US government is not troubled about what my happen to the value of these investments held by foreign governments. Why care about foreign buyers? The only thing that matters is whether US voters are happy and the economy is growing.
Still, large buyers on becoming more vocal with their concerns. As quoted by Guan Tao, the head of international payments department of the SAFE (State Administration of Foreign Exchange),’The US may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home.” This sums up the argument from the perspective of foreign bond holders.
With the debt ceiling problem coming to a head and Moody’s talking about a rating decline, China is feeling nervous about their US holdings, but there is little it can do about it. There is not a good option with the euro and there is not enough bonds available from stronger currency countries. The comments are meant to sway the US to a more debtor friendly policy, but it is unlikely that the US will adapt this type of view.
This Chimerica issue of China supply goods and credit while the US is a buyer and debtor cannot last. This will be a growing flashpoint in finance which may become more relevant in the course of the next few weeks.
No comments:
Post a Comment