If Alan Greenspan were serious about rehabilitating himself, he could hire himself out to central banks and instruct their officials in the art of Looking Serous and Appearing to Say Important Things While Actually Communicating Nothing. This is a crucial skill for anyone in an important bureaucratic position. The Chinese could use a few lessons.
In a bit more than 48 hours, the Chinese taketh away and giveth back again. On Friday, the central bank released a review that called, in no uncertain terms, for the IMF to play a larger role in managing member’s foreign exchange reserves, and called for a greater role for special drawing rights. This statement was seen as a reiteration of views expressed by Governor Zhou back in March. The dollar fell on the news.
Today we get this, via Bloomberg:
People’s Bank of China Governor Zhou Xiaochuan said the nation won’t change its currency reserve policy suddenly, helping the dollar to snap a two-day decline.
“Our foreign-exchange reserve policy is always quite stable,” Zhou told reporters at a central bankers’ meeting yesterday in Basel, Switzerland. “There are not any sudden changes.”
The dollar slumped on June 26 after the central bank renewed its call for a new global currency, fueling speculation it will diversify its reserves, the world’s largest at more than $1.95 trillion. U.S. President Barack Obama needs the support of China as his government tries to spend its way out of a recession.
“I don’t see any practical alternative as a key reserve currency when I look around,” said David Woo, London-based global head of foreign-exchange strategy at Barclays Capital. China’s proposal to expand the use of special drawing rights, the unit of account used by the International Monetary Fund, isn’t a “practical solution” because they aren’t liquid, he said.
This certainly looks like a retreat, although Zhou may simply be clarifying the difference between long term policies and immediate plans. But that still begs the question of when and how the transition between the two comes into play.
The tension may also reflect the need to posture aggressively before a domestic audience without unduly rattling markets. But it may also result from the need to appease certain interests within the government. A New York Times article last year explained that as the central bank took foreign exchange losses as the RMB rose, it may have to go hat in hand to the finance ministry, which opposes many of the central bank’s policies, particularly on the dollar:
The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.
The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the International Monetary Fund’s former division chief for China.
“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.
Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall….
The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value….
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
Despite the seemingly confused state of play, all the dollar and Treasury bulls seem to be back in the pool. Related stories on Bloomberg are positively exuberant. We have, count ’em, three “trend is changing” story. You’d think this was the fashion industry telling the middle class what colors were in this year. Or maybe more like Pravda, where the public is told what to think:
Treasury Bond Dealers Say Worst Over as Demand Soars at Sales
Commodity Rally May End as Supply Rises, Speculators Sell Bets
Dollar to Rise Most Since 1981, Best Predictor Says
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It is interesting that as soon as some relief from the downturn appears, the players return to orthodoxy and look forward to a restoration of the status quo ante. The tide of reform, feeble as it was, has already ebbed. Yet there are two unaccounted-for elements of dissonance in the emerging triumphal relief: the first is the ongoing bankruptcy of world finance and the second is the consciousness of this fact among the general population. When the next phase of the crisis breaks the authorities will meet opposition to their fixes. And so the tide will once again come in, this time in an atmosphere of greater global rancor and disarray.
Along with playing to the domestic audience, the first high-level China-US military talks in 18 months took place in China last week.
To other NC fans who may not be aware of Michael Pettis, he's put up some solid posts on China recently.
I see this as more of a clarification of intent rather than a reverse of policy. I once suggested on one of Brad Setser's blogs that China could stop buying a percentage of treasuries for a month to strong arm the US to review its fiscal policy. I think the clear message is that any large movement such as this could destabilise things and pose a threat to China's holdings. The message would be that the rebalancing will be slow to protect exports and the value of Chinas holdings. The question then becomes could their be conditions under which they could accelerate the transition and here I would be looking closely at the financial state of some of China's state enterprises.
My info is that China is not selling any bonds. Their holdings of US paper is pretty stable. They have clearly reduced their holdings of FNM and FRE paper (who could blame them?) The reduction in Agency paper was offset by increases in direct T paper.
The problem that I see is that China is aggressively moving down the maturity of its holdings. They do not have to sell anything. If they wait two years 80% will have matured.
Moving down in average life when the yield curve is so steep is a costly decision. Therefore you must assume that they are doing this as part of an exit strategy.
The Chinese will vote with their feet. They are just taking their time doing it.
"He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value."
Doesn't that controversial assertion sound familiar?
“Our foreign-exchange reserve policy is always quite stable,” Zhou told reporters at a central bankers’ meeting yesterday in Basel, Switzerland. “There are not any sudden changes.”
Did anyone suggest a "sudden" change? Why was Zhou responding to these charges?
Interesting the conversation took place in Basel, Switzerland.
Bruce,
Good point, but as long as the US is running a trade deficit with China, they (presumably) need to keep buying our bonds. And the Chinese trade surplus has not fallen, while the rest of Asia's has plummeted. So they are becoming the only game in town for now, capital export wise.
Setser, when our deficits were larger, stressed that the Chinese did not need to sell, merely buy less to cause problems for us. And the shorter maturities seemingly gives then even more opportunity to buy less (as in not replace maturing debt fully at some point….)
Yves,
We should expect that the Chinese will run B?OB and CA surpluses for ever, so you are right they are in the capital export business. There is no rule that the have to hold their US trade surplus in US dollars. They can pick any currency they choose for incremental reserves. They might even buy something more solid like copper, steel and other raw materials.
If Tim Geithner goes to China and says, "If you want to export to the US market you have to buy our bonds", we are going to have a problem. You can lead that horse to our water but there is nothing to say there are going to drink it.