Within a decade China has built a fabulous exchange reserves mainly in dollars. The official figure reached 1.9 trillion dollars and some of the estimated more than 2300 billion dollars.'s GDP of china, it comes only reach 3.5 trillion dollars. These reserves in recent months of financial turmoil aroused great passions and especially very large fantasies.
The problem is often stated as follows: during the last decade, trade relations between the U.S. and China were unbalanced. China has enjoyed a strong trade surplus that enabled him to build huge foreign reserves that it has converted mainly U.S. Treasury bills. But with the economic crisis and financial deficits have exploded U.S. State (the U.S. deficit will reach 12.9% of GDP in 2009) and the Fed has blithely run printing money (base money doubled in the United States within 6 months). China feels trapped address these growing risks of default and inflation. High inflation in the U.S. would collapse the price of dollars and therefore result in a loss of capital importance for the Chinese central bank. Chinese stir, and call on U.S. to pursue a fiscal policy and monetary wise. The Chinese treasure may evaporate. tensions grow between China accused the U.S. of Chinese exports have paid with funny money and the U.S. accusing China of deliberately manipulating the exchange rate to maintain strong trade surpluses. The delicate balance between Chinese who are benefiting from their trade surplus to maintain strong growth and the U.S. who are financing their monstrous budget deficit by the Chinese government could collapse with all the consequences that implies.
The reasoning I have just described is virtually meaningless. Yet it is repeated with the utmost seriousness by a large number of commentators decked out in their caps "expert". As often, the most basic principles are evaded. To try to understand the situation in China meet its reserve we will reflect on some points.
First, China's reserves have so far been the big winners in this economic crisis. Interest rates on U.S. Treasury bonds have collapsed. This implies that the price of long-term bonds held by the Chinese central bank has exploded. Meanwhile, the dollar was widely reassessed against the euro. The consequence is obvious: the value of China's reserves is more important than it was a year ago.
But there not even the issue. In reality, the Chinese central bank to make capital gains or capital losses, it has almost no importance.
How are China's reserves?
When currency area enjoys trade surpluses against another currency zone, the currency of this material should be revalued (its value should increase). When a U.S. company important to China, it pays in dollars. These dollars are then changed by the Chinese company in yuan. When Chinese purchases in the U.S., it will change its yuan to dollars. Thus, if China exports more to the United States it imports, the demand for yuan against dollar will be stronger than the demand for dollars against Yuan. Thus, as the basic principle of supply and demand, the value of the yuan against the dollar should rise. But if the yuan is reassessed, Chinese products may be less attractive for American companies. Likewise, American goods are more attractive to Chinese consumers. Thus, it would deal a blow to China's growth. To maintain the competitiveness of Chinese products, the central bank intervenes in markets exchange to achieve the desired exchange rate. To do this, it simply creates it sells the Yuan against the dollar. This will balance the effect of trade surpluses and the course of the Yuan remains stable. These dollars are then reinvested in Treasury bills for the simple reason that it is impossible to find 2000 billion dollars in base currency. Base money was only 800 billion U.S. a few months ago. Treasury bills are both the closest substitute of money and financial assets are widely available since the Bush presidency.
China has accumulated this treasure of war not for future needs but to stimulate and sustain economic growth at two points in his country. Fears about a "capital loss" of China's central bank are absolutely irrelevant. Again, many commentators confuse bank and central bank. Both types of institution have nothing to do.
What could make the Chinese government with these reserves? He can not spend it on the market because it would mean a conversion of dollars into yuan, which would mechanically raising the price of the yuan. That is exactly the effect that the government China tries to avoid. The Chinese government does not use large-scale reserves for placing orders abroad because this would penalize its own industry. The Chinese government can not begin to buy large shares of foreign private companies. Indeed, if this was done on a large scale, the tensions would be too great with the countries where companies are based. What sovereign state would support the nationalization of its business by a foreign government?! Such a strategy would only provoke protectionist reactions weakening the Chinese export industry. 2 000 billion unusable!
Do not forget that the Chinese government's goal is the industrial and economic growth and not the accumulation of foreign reserves. Thus, if foreign reserves are losing their value, it would not change anything .... China is by no trapping dollars as the value of its foreign exchange reserves does not affect its real wealth.
It is really strange that so much confusion may be done about it. Mercantilist episodes in Europe of the sixteenth and seventeenth century are yet well known. This economic ideology was to accumulate gold reserves of the most important potential by exporting as much as possible and the least important. The gold used in power to buy weapons to defeat his opponents and survive. It was in the service of economic policy. It was then, thanks to Ricardo and its precursors, including the direction of the exchange was to increase production at each of the commercial players to improve the material well-being of populations.
It is really amazing to see so many commentators moved possible "loss of capital" of China's central bank. Some also fear for the capital of EDF buys more and more debt to support its private bank loans. A central bank is not a bank. The confusion comes from the form in which central banks' balance sheets for companies like classical value of the asset is equal to the liabilities. Reserves in gold and foreign exchange, loans made to banks are capitalized. The currency in circulation is the liability. If the asset is devalued, what about liability? Money Does any value because it is supported by the value of the assets of the bank Central? The answer is no. The great economist Silvio Gesell already ridiculed in the 1910s the style of German banknotes "This ticket entitles you to 100 marks from the Central Bank", explaining that it is identical to write "who will share his ticket to the central bank will receive 100 strokes of the cane. " The currency has no value because it has an equivalent to the central bank, it has value because there is a demand for money, that money is scarce and it is recognized by the state and used to pay the tax. The central bank balance sheet structure as rest of our monetary system is a relic of the old gold standard. We experience reality in a system that has not been redesigned in the fall of Bretton Woods. Keynes took up the concept of money demand Gesell'm taught in all classes of the world economy, the ridiculousness of the situation does not jump in the eyes of many.
A question persists. Why Chinese rulers they are moved to the political risk of significant inflation in the U.S. (according to risk me greatly overstated)? The reason is simple, if markets expect high inflation, the dollar could collapse. Automatically, the yuan will be stronger against the dollar than it was and Chinese exports may suffer greatly.
What China fears reality is that in the United States begin to practice the same strategy as his own, that is to say, is to knowingly to devalue its currency to boost its exports. What the world should fear is a mad race to the devaluation. Currently only China and some Asian countries including Japan's large-scale practice. These devaluations allow China to take greater advantage of international trade as their neighbor. This is the famous strategy "remains your neighbor." As China is the only practice it, it only causes of the financial imbalances. However, if everyone practices this strategy, the effects can be catastrophic. One of the great lessons of the 30s. The competitive devaluation that took place in the 30's was the final result of uncontrolled rising protectionism and a total disruption of world trade.
If the strategy of China was tolerable during expansion, it becomes difficult in times of crisis. If in the coming years China continues to maintain strong trade surpluses, while manipulating its currency, while unemployment remains very high in Western countries, tensions will worsen. These reserves, if it is unnecessary to have great chance to become the anchor of our economic frustrations.
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