Chinese Currency Reserves Revealed

[Realistbear]

http://uk.finance.yahoo.com/news/heavy-in-dollars-china-warns-of-depreciation-reuters_molt-6bf5ef6540ed.html?x=0

Heavy in dollars, China warns of depreciation

Zhou "Bill" Xin and Simon Rabinovitch, 7:57, Friday 3 September 2010

BEIJING (Reuters) - China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks.

The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion (1.59 trillion pounds), are held roughly in line with what was described as the global average:

65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.

The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers.

Given that the Chinese econmy has been largely built on the back of US purchases (how many items do we even buy NOT made in China) so it should be no surprise that they have a vast amount in $. The tiny Yen holding may have more to do with politics than economics--Japan did, after all, invade China in a massive SE Asian land grab in the 1930's before they attempted to warn the US off by bombing Hawaii.

[Bloo Loo]

All they gotta do is spend it.

or the US might default...still, they could spend it even if the US defaulted.

who cares about 1% return when you HAVE 100,000,000,000 to spend and can retaliate with serious inflation on the defaulters.

[gravity always wins]

The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion (1.59 trillion pounds), are held roughly in line with what was described as the global average:

65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.

The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers.

Given that the Chinese econmy has been largely built on the back of US purchases (how many items do we even buy NOT made in China) so it should be no surprise that they have a vast amount in $. The tiny Yen holding may have more to do with politics than economics--Japan did, after all, invade China in a massive SE Asian land grab in the 1930's before they attempted to warn the US off by bombing Hawaii.

Lets think about this a bit, its not the PBOCs money after all central banks don't make kiddies toys etc.

The dollar reserves are only one half of the chinese central banks balance sheet. The central bank has to borrow Yuan to swap for the dollars the commercial banks hold on behalf of their industrious clients.

It can only be true that the chinese central banks has all these dollar reserves at its disposal if none of the exporters were allowed to keep these earned dollars through exports.

They can't and won't dump their dollar holdings just like that as they have Yuan liabilities on the other side of their balance sheet which would grow.

As to what they will do - it gets too complicated. But not that complicated that we can still keep perpetuating the same old myths.

[Ruffneck]

I know, I know, but...

If the Chinese were to invest just 5% of their $2.45Tr into gold (a mere $122.5Bn)...

Guess how much gold that would buy?

98 million ounces, or 3,062,500 kg

About 3000 tonnes.

For the record, there is supposed to be about 8000 tonnes in Fort Knox.

That's how much money there is sloshing around looking for a home.

There probably is 8000 tons in Fort Knox , 8000 tonnes of tungsten

http://news.goldseek.com/GoldSeek/1267541820.php

[R K]

They've had to buy $2.5 TRILLION to remain in business.

They're going down harder than Frank Bruno in the 5th.

[singlemalt]

They've had to buy $2.5 TRILLION to remain in business.

They're going down harder than Frank Bruno in the 5th.

I'll not tolerate any disrespect to our Frank.

Career record - W41 L4 D0

Wins by K.O 40 (this is higher than Mike Tyson's record btw).

Our Frank is one of the best Heavyweights Britain will ever have.

[Traktion]

Lets think about this a bit, its not the PBOCs money after all central banks don't make kiddies toys etc.

The dollar reserves are only one half of the chinese central banks balance sheet. The central bank has to borrow Yuan to swap for the dollars the commercial banks hold on behalf of their industrious clients.

It can only be true that the chinese central banks has all these dollar reserves at its disposal if none of the exporters were allowed to keep these earned dollars through exports.

They can't and won't dump their dollar holdings just like that as they have Yuan liabilities on the other side of their balance sheet which would grow.

As to what they will do - it gets too complicated. But not that complicated that we can still keep perpetuating the same old myths.

Presumably, they could switch their dollar holdings to some other assets, thus keeping their Yuan liabilities covered?

In other words, why would this USD/Yuan relationship stop them being able to dump their dollar holdings, as long as they buy some other assets with said USD?

[Traktion]

All they gotta do is spend it.

or the US might default...still, they could spend it even if the US defaulted.

who cares about 1% return when you HAVE 100,000,000,000 to spend and can retaliate with serious inflation on the defaulters.

Exactly. While defaulting on debts to China may not be great for the Chinese, the retribution they could dish out could be swift and destructive for the US economy.

If China suspects that they will get a negative return on their USD, why would they bother holding on to the currency? They seem to have cottoned on to this already and are selling Treasuries, but the pace of this sell off could rapidly accelerate if the Chinese have their hand forced. The fall off in demand for USD could trigger vicious inflation on its own (with USD value collapsing), never mind the trouble they would have finding new buyers for their debt in such a circumstance (and swapping printed money between the US and UK isn't going to stop either currency collapsing if this happens).

In summary, China may worry about getting their money back in full, but the US should be much more worried about how much power China has over them.

Edited September 3, 2010 by Traktion

[easy2012]

Exactly. While defaulting on debts to China may not be great for the Chinese, the retribution they could dish out could be swift and destructive for the US economy.

If China suspects that they will get a negative return on their USD, why would they bother holding on to the currency? They seem to have cottoned on to this already and are selling Treasuries, but the pace of this sell off could rapidly accelerate if the Chinese have their hand forced. The fall off in demand for USD could trigger vicious inflation on its own (with USD value collapsing), never mind the trouble they would have finding new buyers for their debt in such a circumstance (and swapping printed money between the US and UK isn't going to stop either currency collapsing if this happens).

In summary, China may worry about getting their money back in full, but the US should be much more worried about how much power China has over them.

Because they want to sell to the US, not the US wants to buy from them. US is hugely abusive about its reserve currency position and the tide will turn when many people start doing business in RMB. And yes, when that happen, large chunk of USD will seek to buy anything and everything on the US shore and result is Weimar Republic...

[Traktion]

Because they want to sell to the US, not the US wants to buy from them. US is hugely abusive about its reserve currency position and the tide will turn when many people start doing business in RMB. And yes, when that happen, large chunk of USD will seek to buy anything and everything on the US shore and result is Weimar Republic...

Agreed. I wonder if this stuff floats through Bernanke's head as he's printing up USD?

[Alan B'Stard MP]

people start doing business in RMB.

I don't see it myself.

Even the Chinese know its paper - which is why they hold USD.

Devil takes the hindmost and all that.

[Nationalist]

Presumably the PRC acquired its forex holdings by selling yuan to domestic manufacturers who were getting paid in Western currencies for selling us tat.

But where did those yuan come from? Methinks the People's Bank just printed them from nothing.

[Alan B'Stard MP]

Presumably the PRC acquired its forex holdings by selling yuan to domestic manufacturers who were getting paid in Western currencies for selling us tat.

But where did those yuan come from? Methinks the People's Bank just printed them from nothing.

As any good currency board should.

[Georgia O'Keeffe]

http://uk.finance.yahoo.com/news/heavy-in-dollars-china-warns-of-depreciation-reuters_molt-6bf5ef6540ed.html?x=0

Heavy in dollars, China warns of depreciation

Zhou "Bill" Xin and Simon Rabinovitch, 7:57, Friday 3 September 2010

BEIJING (Reuters) - China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks.

The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion (1.59 trillion pounds), are held roughly in line with what was described as the global average:

65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.

The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers.

Given that the Chinese econmy has been largely built on the back of US purchases (how many items do we even buy NOT made in China) so it should be no surprise that they have a vast amount in $. The tiny Yen holding may have more to do with politics than economics--Japan did, after all, invade China in a massive SE Asian land grab in the 1930's before they attempted to warn the US off by bombing Hawaii.

Someone should tell them someoneones tea leaved 1 percent of their money, i guess its true if you nick it in small amounts nobody notices. Perhaps someone should tell the bankers about this slightly superior strategy

Edited September 3, 2010 by Tamara De Lempicka

[gravity always wins]

Presumably, they could switch their dollar holdings to some other assets, thus keeping their Yuan liabilities covered?

In other words, why would this USD/Yuan relationship stop them being able to dump their dollar holdings, as long as they buy some other assets with said USD?

Got any easy questions!

Any dumping of the dollar will put pressure on the PBoC balance sheet their assets will fall in relation to their liabilities.

The effect will be a redistribution inside the Chinese economy from Long dollar exporters to short dollar consumers. As the Yuan rises exporters will get hurt but consumers will benefit from lower prices.

This is a rebalancing of wealth from the state to the private sector but leave the state with a gap that would need to be filled.

Just a thought to throw in but if we all believe the RMB is undervalued then China takes a loss on every trade it makes with the US, the loss is already there but will not be realised until a revaluation occurs.

If the RMB is revalued by 10% then the value of the PBoCs reserves drop by 10% in Yuan terms but as the dollars can only be spent abroad it matters not as the value of imports also drops by 10% so China loses nothing as it is still able to buy as much stuff. The value of its reserves has fallen in RMB terms but it comes back to the earlier part of selling stuff too cheap in the first place.

The question is my mind is not will the Chinese dump their reserves but can they start the switch from production to consumption to allow the dumping to occur.

Any one out there who can add to this head scratcher is more than welcome it sends my head spinning!!

[Traktion]

I don't see it myself.

Even the Chinese know its paper - which is why they hold USD.

Devil takes the hindmost and all that.

But when does a flight to safety become less US centric and more Chinese?

TBH, I don't think they need to issue vast amounts of RMB to the international markets, as selling USD and buying commodities could be all they need to do anyway. I just wonder why they would look a gift horse in the mouth, if everyone looks eager to lend them cheap money.

[gravity always wins]

Presumably the PRC acquired its forex holdings by selling yuan to domestic manufacturers who were getting paid in Western currencies for selling us tat.

But where did those yuan come from? Methinks the People's Bank just printed them from nothing.

Some RMB bonds and some printing as far as I am aware.

[gravity always wins]

I don't see it myself.

Even the Chinese know its paper - which is why they hold USD.

Devil takes the hindmost and all that.

Nope they need Dollars to buy stuff, everyone does which allows the US to abuse its reserve currency status.

Plus they had to sell Yuan for dollars to maintain the exchang rate and hollow out the wests economy and industrialise themselves.

China has paid for its industrialisation through cheap sweat but the bill hasn't arrived yet

Anyway at the end of the day its all paper promises.

Apparently the big deal now is to buy Zimbabwean paper.

[Traktion]

Got any easy questions!

Any dumping of the dollar will put pressure on the PBoC balance sheet their assets will fall in relation to their liabilities.

The effect will be a redistribution inside the Chinese economy from Long dollar exporters to short dollar consumers. As the Yuan rises exporters will get hurt but consumers will benefit from lower prices.

This is a rebalancing of wealth from the state to the private sector but leave the state with a gap that would need to be filled.

Just a thought to throw in but if we all believe the RMB is undervalued then China takes a loss on every trade it makes with the US, the loss is already there but will not be realised until a revaluation occurs.

If the RMB is revalued by 10% then the value of the PBoCs reserves drop by 10% in Yuan terms but as the dollars can only be spent abroad it matters not as the value of imports also drops by 10% so China loses nothing as it is still able to buy as much stuff. The value of its reserves has fallen in RMB terms but it comes back to the earlier part of selling stuff too cheap in the first place.

The question is my mind is not will the Chinese dump their reserves but can they start the switch from production to consumption to allow the dumping to occur.

Any one out there who can add to this head scratcher is more than welcome it sends my head spinning!!

Sorry for the spinning head!

My take on this would be, that the RMB is undervalued intentionally, in order to keep selling the west the stuff they're manufacturing. I think most people take that as granted, as otherwise we wouldn't have such a huge imbalances between the US and China. People have pointed to this and said this is why China can't change direction, without ruining their export industry. In this respect, I would agree.

However... I don't think that China wants to stay as the world's biggest sweatshop/manufacturer of tat. I'm quite sure that they still dream about restoring the dynasty of old and becoming the biggest and most powerful economy in the world. I also think that getting the US in knots is very much part of the plan - they've given them enough rope to hang themselves, whenever China kicks away the chair.

With that in mind, I think it is their intention to decimate a portion of its own industry, in order to stick the knife between the ribs of the Americans. By allowing their currency to rapidly increase in value (not 10%, more like 300+%), it would spur internal consumption, while giving them the wealth to help with the transition from sweatshop to superpower (if it isn't considered that already).

How would they allow their currency to increase in value? Two steps, I would say - buying up gold and other commodities with USD, to retain as much of their wealth as possible in, while they start selling RMB government bonds (EDIT: to the international market - they have started already with Panda bonds, apparently). The latter will present a new safe havens from the collapsing USD, while at the same time increasing their currency value dramatically as planned (both relative to crashing USD and in demand RMB).

Sure, major disruptions would occur, but do we think that China would look at the short term, when the long term could be extremely lucrative? TBH, it's looking a bit like a master stroke to me (*stokes cat on knee* ), but I'm just some guy posting on a forum!

Edited September 3, 2010 by Traktion

[Alan B'Stard MP]

Nope they need Dollars to buy stuff, everyone does which allows the US to abuse its reserve currency status.

Plus they had to sell Yuan for dollars to maintain the exchang rate and hollow out the wests economy and industrialise themselves.

China has paid for its industrialisation through cheap sweat but the bill hasn't arrived yet

Anyway at the end of the day its all paper promises.

Apparently the big deal now is to buy Zimbabwean paper.

I have no idea what you are on about.

[Nationalist]

It would be fascinating to know the PRC's stragegy, but they invented inscrutability!

They're holding a couple of trillion US$ in US Treasuries mainly. If they stop rebuying t-bills when they expire the US govenment would have to print to make up the difference so the PRC would be left holding devalued pieces of paper. On the other hand if the PRC keeps its reserves in play they get little benefit from holding them (returns on a t-bill are small.)

So the PRC needs to bleed its dollar holdings into the system slowly, gradually swapping dollar t-bills for tangible assets without spooking the markets and causing a dollar plunge. Also they don't want to stoke the price of the assets they're buying; no point bidding against yourself.

The Chinese need an exit strategy and they need to execute it covertly. The occasional "we're still holding X trillion USD" public remark is probably designed to keep confidence in the dollar high for long enough to get out. It's a mega-scale pump and dump. Also, it keeps the Americans soporific; softly, softly catchee monkey!

But what are they buying? What they need is: land, oil, and minerals.

They tend to get rebuffed if they try to buy big Western corporations directly. Suddendly it's political and, "your dollars no good here!"

They seem to be expanding on two fronts: Southern Africa and Southern Russia. In Russia the advance is territorial. They lost the city of Vladivostok to the Russians in the mid-nineteenth century and they are buying it back piece by piece, along with the surrounding region. I reckon they have the whole North-Asian Pacific coast in their sights.

In sub-Saharan Africa they are looking for minerals, buying mines and exploration and exploitation rights, mainly from the corrupt South African government which is feathering its nest big time.

They may also be buying gold, possibly directly from the American government.

What ever they are doing, they must have a strategy, and they aren't going to be telling any foreigners what it is. Some people think they have designs on the North American continent. I reckon they think the Russian underbelly looks far more vulnerable. They want minerals from around the world, and land contiguous to the republic. Think of it as a major rebuild project on the Mongol Empire.

Edited September 3, 2010 by Nationalist

[gravity always wins]

Sorry for the spinning head!

My take on this would be, that the RMB is undervalued intentionally, in order to keep selling the west the stuff they're manufacturing. I think most people take that as granted, as otherwise we wouldn't have such a huge imbalances between the US and China. People have pointed to this and said this is why China can't change direction, without ruining their export industry. In this respect, I would agree.

However... I don't think that China wants to stay as the world's biggest sweatshop/manufacturer of tat. I'm quite sure that they still dream about restoring the dynasty of old and becoming the biggest and most powerful economy in the world. I also think that getting the US in knots is very much part of the plan - they've given them enough rope to hang themselves, whenever China kicks away the chair.

With that in mind, I think it is there intention to decimate a portion of its own industry, in order to stick the knife between the ribs of the Americans. By allowing their currency to rapidly increase in value (not 10%, more like 300+%), it would spur internal consumption, while giving them the wealth to help with the transition from sweatshop to superpower (if it isn't considered that already).

How would they allow their currency to increase in value? Two steps, I would say - buying up gold and other commodities with USD, to retain as much of their wealth as possible in, while they start selling RMB government bonds (EDIT: to the international market - they have started already with Panda bonds, apparently). The latter will present a new safe havens from the collapsing USD, while at the same time increasing their currency value dramatically as planned (both relative to crashing USD and in demand RMB).

Sure, major disruptions would occur, but do we think that China would look at the short term, when the long term could be extremely lucrative? TBH, it's looking a bit like a master stroke to me, but I'm just some guy posting on a forum!

I think you are right in some respects but the Chinese authorities are very cautious this would decimate the long dollar middle classes but increase the purchasing power of the poor majority. Don't know enough about chinese demographics.

Capital is starting to move to the BRICs demand for these currencies will reduce borrowing costs and should start some credit booms happening in Brasil already I see.

Just think it will happen slowly. Developing world rates down developed world rates up - got BRIC real estate.

Just another nutter on t'internet.

[gravity always wins]

It would be fascinating to know the PRC's stragegy, but they invented inscrutability!

They're holding a couple of trillion US$ in US Treasuries mainly. If they stop rebuying t-bills when they expire the US govenment would have to print to make up the difference so the PRC would be left holding devalued pieces of paper. On the other hand if the PRC keeps its reserves in play they get little benefit from holding them (returns on a t-bill are small.)

So the PRC needs to bleed its dollar holdings into the system slowly, gradually swapping dollar t-bills for tangible assets without spooking the markets and causing a dollar plunge. Also they don't want to stoke the price of the assets they're buying; no point bidding against yourself.

The Chinese need an exit strategy and they need to execute it covertly. The occasional "we're still holding X trillion USD" public remark is probably designed to keep confidence in the dollar high for long enough to get out. It's a mega-scale pump and dump. Also, it keeps the Americans soporific; softly, softly catchee monkey!

But what are they buying? What they need is: land, oil, and minerals.

They tend to get rebuffed if they try to buy big Western corporations directly. Suddendly it's political and, "your dollars no good here!"

They seem to be expanding on two fronts: Southern Africa and Southern Russia. In Russia the advance is territorial. They lost the city of Vladivostok to the Russians in the mid-nineteenth century and they are buying it back piece by piece, along with the surrounding region. I reckon they have the whole North-Asian Pacific coast in their sights.

In sub-Saharan Africa they are looking for minerals, buying mines and exploration and exploitation rights, mainly from the corrupt South African government which is feathering its nest big time.

They may also be buying gold, possibly directly from the American government.

What ever they are doing, they must have a strategy, and they aren't going to be telling any foreigners what it is. Some people think they have designs on the North American continent. I reckon they think the Russian underbelly looks far more vulnerable. They want minerals from around the world, and land contiguous to the republic. Think of it as a major rebuild project on the Mongol Empire.

Interesting post. I have a feeling that one of Chinas big plays is silver I think its been stashing away lots of its own production and is also the holder of short positions with the banks this props up the USD and allows them to buy silver on the cheap. I reckon they will renegue on these positions and institute a bimetalic currency.

This would of course destroy a number of investment banks - maybe its more of a dream .

Anyway back to reality the unscrutability of the Chinese whatever they do will be gradual

[Nationalist]

Interesting post. I have a feeling that one of Chinas big plays is silver I think its been stashing away lots of its own production and is also the holder of short positions with the banks this props up the USD and allows them to buy silver on the cheap. I reckon they will renegue on these positions and institute a bimetalic currency.

This would of course destroy a number of investment banks - maybe its more of a dream .

Anyway back to reality the unscrutability of the Chinese whatever they do will be gradual

A position as big as the Chinese have cannot be unwound into a single asset class. They must have a national plan, involving positions in all asset class plus substantial investments in infrastructure, plus major population movements into Russia and Africa. They are laying the foundations for a mid-21st century empire; an empire with a bigger splodge on the map, and a financial/technical/cultural hegemony. Basically they will try to ensure that the future is Chinese. Look for it in prestige projects like space programmes; raw material acquisition; mass population grooming - education and raising of expectations, and population relocation to land they'd like to own.

A big red arrow in the sky would be if they drop the "one baby" policy. Then you'll know the dragon is awakening. Remember China has been the world super-power for 18 of the last 20 centuries and it's only due to some Imperial feet of clay that they didn't occupy North America before the Europeans got there. While Columbus was crossing the Atlantic in caravels, the Chinese had junks longer than a football pitch and almost as wide. Admiral Zheng He had a fleet of 300 ships with 30,000 sailors on board in the 15th C. (I say "sailors", the crew included courtesans.)

[alexw]

Sorry for the spinning head!

My take on this would be, that the RMB is undervalued intentionally, in order to keep selling the west the stuff they're manufacturing. I think most people take that as granted, as otherwise we wouldn't have such a huge imbalances between the US and China. People have pointed to this and said this is why China can't change direction, without ruining their export industry. In this respect, I would agree.

However... I don't think that China wants to stay as the world's biggest sweatshop/manufacturer of tat. I'm quite sure that they still dream about restoring the dynasty of old and becoming the biggest and most powerful economy in the world. I also think that getting the US in knots is very much part of the plan - they've given them enough rope to hang themselves, whenever China kicks away the chair.

With that in mind, I think it is their intention to decimate a portion of its own industry, in order to stick the knife between the ribs of the Americans. By allowing their currency to rapidly increase in value (not 10%, more like 300+%), it would spur internal consumption, while giving them the wealth to help with the transition from sweatshop to superpower (if it isn't considered that already).

How would they allow their currency to increase in value? Two steps, I would say - buying up gold and other commodities with USD, to retain as much of their wealth as possible in, while they start selling RMB government bonds (EDIT: to the international market - they have started already with Panda bonds, apparently). The latter will present a new safe havens from the collapsing USD, while at the same time increasing their currency value dramatically as planned (both relative to crashing USD and in demand RMB).

Sure, major disruptions would occur, but do we think that China would look at the short term, when the long term could be extremely lucrative? TBH, it's looking a bit like a master stroke to me (*stokes cat on knee* ), but I'm just some guy posting on a forum!

The Yuan is estimated to be 30-40% undervalued. So allowing their currency to float will no way be enough to allow the chinese masses to consume in large enough quantities for their economy to rebalance. Not when the average chinese wage is something like £300 per year. Not when the top 10% earn 65 times the poorest 10%. The chinese masses simply don't earn enough, and still won't after a revaluation. China's discretionary income is pretty much all vacuumed up by the elites and invested in bringing more production online. There's also other factors to consider such as the 12h 7 days a week work week - people under such a system won't have the time or energy to consume.

China's economy doesnt just need rebalancing in terms of currency, but also in many other ways - something which is impossible for their leaders to engineer in the time frame they have. It's why the idea of rebalancing is just a mirage and why we are all ******ed.