Reserve diversification — what does the IMF data tell us?
There is a lot of interest in reserve diversification.
And most of those present at the May Euromoney fx conference in London—judging from the audience poll – believed that at least some central banks are diversifying.
My comments back then emphasized the unprecedented pace of reserve growth rather than diversification. Large-scale diversification seems hard to square with the record growth in central bank custodial holdings of Treasuries and Agencies reported by the New York Fed.
My argument fell flat. I sort of understand why.
Flows drive markets and at the time the most visible flow in the currency market came from ongoing central bank sales of dollars for euros, pounds and a few other currencies. G-10 currency traders care far more about the amount of dollars central banks sell than the amount they keep. Presumably those trading US treasuries or agencies have a slightly different point of view.
So I decided to step back and look at the data — and specifically the data from emerging economies countries that report to the IMF. That doesn’t tell us what central banks are doing now. But it provides the most detailed picture available of what central banks – or at least those central banks that report data on the currency composition of their reserves to the IMF – have done in the past.
Looking at the IMF data has another advantage. I don’t need to make any assumptions to flesh this data out – it comes straight from the mouth (or spreadsheet) of reporting central banks.
The first chart shows the stock of reserves and the dollar share of those reserves on different axis.
The second chart shows flows – i.e. the change in dollar reserves and the change in non-dollar reserves – implied by the stock data reported in the COFER data set. Calculating flows is fairly straight-forward: the COFER stock data makes it easy to strip out the impact of valuation gains (losses) and thus to infer flows.
A couple of things jumped out at me.
First, those reporters who equate changes in the dollar’s share of total reserves with changes in total dollar holdings do their readers a disservice. Emerging market central banks clearly added a lot of dollars to their portfolio in q4 even though the dollar’s share of their reserves slipped a bit. Overall reserves are growing fast. Too much attention – in my view – is given to changes in the dollar’s share of reserves and too little to the actual flows.
Second, those emerging economies that report data to the IMF did diversify – in the sense of lowering the dollar share of their reserves – between the end of 2001 and the end of 2003.
If you match the flows data to the chart showing the dollar share, there two quarters of what might be called “active” diversification. In both q3 2002 and q4 2003, reporting central banks bought a lot of euros and other currencies even as the dollar was falling.
In those quarters central banks added to the pressure on the dollar.
Central banks also engaged in “passive” diversification. Through the end of 2003, if not a bit later, they allowed the rising dollar value of existing euros and pounds to reduce the dollar’s share their portfolio.
Third, emerging economies bought a lot of euros and pounds in q1 and q2 of 2005 – enough to lower the dollar share of their reserves slightly (it subsequently rebounded). It is hard though to call this diversification, though, as the dollar rose in these quarters and they basically held the dollar share of their reserves constant.
The flows in Q1 2005 perhaps to represent some true diversification – the dollar was reasonably strong that quarter, and, based on the flow data, a lot of emerging economies sold some of the dollars that they had bought in q4 2004 for euros and pounds. But in q2 2005 the dollar rose sharply in value (the euro fell). Central banks bought euros when private markets wanted to sell. Their demand for euros was stabilizing.
Fourth, the salient feature of the past quarter and indeed the past year, at least to me, has been the strength of dollar reserve growth. Reporting emerging economies added $200b to their dollar reserves – a record for this group. That kept the dollar’s share of their reserves roughly constant even as the dollar slid against the euro, increasing the dollar value of their existing euro and pound reserves.
Fifth, central banks that report data on the currency composition of their reserves to the IMF also bought over $100b in non-dollar assets. If one assumes that they generally intervene by buying dollars (for their own currency), that means that they were constantly selling dollars. But they weren’t actually diversifying. They consistently kept far more dollars than they sold, maintaining the dollar’s overall share of their total reserves.
Let’s look specifically at the data for q4 2006. Both dollar and non-dollar reserve growth spiked up in q4 2006. Emerging economies that report the currency composition of their reserves to the IMF added $64b to their dollar reserves, and $37b to their non-dollar reserves (this data has been adjusted for valuation, it is measure of the “flows”). The dollar’s share of the reserves of those emerging economies that report to the IMF fell slightly, going from 60.35% at the end of q3 to 59.7%
To me, the most important data point is the $64b in dollar reserve growth from those emerging economies who report data to the IMF. $64b is the second highest quarterly total for this group of countries, topped only by the $67b in q4 2004. It was enough to finance roughly a third of the United States current account deficit in q4.
Those who interpret the slight fall in dollar’s share of emerging market – and total – reserves as evidence that central banks are reducing their dollar holdings haven’t looked closely enough at the details of the data. A fall in the dollar’s share doesn’t imply any reduction in dollar holdings so long as reserves are growing rapidly. Total dollar holdings increased very, very rapidly in q4 – just not quite rapidly enough to keep the dollar’s share of total reserves constant, especially given the large increase in the dollar value of existing euro and pound reserves.
I believe that emerging economies that don’t report added $117b to their reserves — that total includes SAMA’s reported foreign asset growth and an estimated $15b in Chinese bank swaps in q4 so it is a bit higher than the total in the COFER data. If one assumes that a fairly large share of that flow – a flow which comes primarily from China and a set of oil exporting economies that manage their economies against the dollar – went into dollar assets, emerging economies potentially financed an exceptionally large share of the US deficit in q4 2006.
The COFER data, though, can also support a “diversification” story. Non-dollar flows were strong for one thing. And the dollar reserve growth, while large, wasn’t quite enough to keep the dollar share of these countries’ reserves constant. If those emerging economies that report data had wanted to maintain a 60.35% dollar portfolio share, they would have needed to have bought added about $79b to their dollar holdings, not $64 — and correspondingly reduced the non-dollar purchases to around $22b.
However, the dollar share of these countries that report detailed reserve data to the IMF has bounced around a bit. It was as low as 59% in q1 and q2 2005 – and q4 isn’t that different from q2. I would want to see a bit more of a trend before arguing that a new era of diversification has started.
We can do a bit more with the data as well.
Russia almost certainly reports data on the currency composition of its reserves to the IMF. It also reported that it added $31b to its foreign exchange reserves on a flow basis in the fourth quarter. So Russia accounts for a little under a third of the total flows from reporting emerging economies.
Russia clearly diversified its reserves over the course of 2006. Indeed, Russia has reported that it brought the dollar share of its reserves down to around 50% (49%) by the end of the third quarter.
Suppose Russia maintained a constant 50/50 dollar/ non-dollar split during the fourth quarter. It would have needed to have added $18b to its dollar reserves, and $13b to its non-dollar reserves. The dollar slid in value, so its dollar reserve needed to be ‘topped up” out of the flow. That implies $46b in dollar reserve growth for other reporting emerging economies, and $24b in non-dollar reserve growth –
Suppose instead that Russia wanted to lower the dollar share of its reserves from 50% to 45%. In that scenario, it would have added $4b to its dollar reserves and $27b to its non-dollar reserves. Other emerging economies would have added $60b to their dollars, and $10b to their non-dollar reserves. In effect, other emerging market central banks would have facilitated Russia’s diversification by increasing their own dollar holdings to offset Russia’s sales (and the resulting dollar weakness).
I cannot yet be sure which of these two things happened.
But there is a puzzle in the data for 2006: Russia’s diversification doesn’t seem to have had much of an impact on the aggregate dollar share of the portfolio of reporting emerging economies.
And we know Russia diversified over the course of 2006. We actually now know that it more or less had completed the bulk of its diversification by the end of June 2006. The dollar share of its reserves was around 50% then. There is no shortage of supporting evidence either — the large valuation gains Russia reported in q4 2006 are consistent with a low dollar reserve share. The US data shows a sharp fall in Russia’s holdings of US assets in q1 2006.
Indeed, based on the US data (along with data on the valuation gains on Russia’s reserve portfolio reported by the Bank of Russia), it seems unlikely that Russia started diversifying in a big way before the beginning of 2006, and it is pretty clear that it had large completed that diversification by the end of June. The dollar’s share of reporting emerging markets also slid a bit during this period – but not by as much as one might have expected. The same is even more true for data for the year.
Suppose Russia’s dollar share fell from 70% at the end of 2005 to 50% by the end of 2006. This is a hypothesis, not a fact. My favorite data source – the US portfolio survey – suggests that the basic path is right. Russia’s reported “onshore” US dollar holdings were 68% of Russia’s reserves at the end of q2 2004, 66% of Russia’s reserves in q2 2005 and only 48% of Russia’s reserves at the end of q2 2006. Russia presumably has a few offshore dollar deposits as well. That data thought doesn’t tell us whether Russia started to diversify at the end of 2005 or waited until 2006. However the higher frequency US TIC data shows a steady rise in Russian short-term claims on the US through December 2005 and then a sharp fall. That fits the basic story pretty well – but this is an art as much as a science.
But let’s assume that the basic scenario is right. To bring the dollar share of its portfolio down from 70% to 50%, Russia would have added about $25b to its dollar holdings in 2006 and $83b to its non-dollar holdings. If Russia does report to the IMF – as I think is the case — other reporting emerging economies necessarily added $197b to their dollar reserves, and only $32b to their non-dollar reserves.
That is kind of stunning. So stunning that it calls into question my proposed diversification path. Russia may have had slightly less than 70% of its reserves in dollars at the end of 2005.
But Russia clearly reduced its dollar share over the course of 2006. Consequently, the fact that the dollar share of those emerging economies that do report to the IMF didn’t fall even as Russia’s dollar share fell implies fairly rapid growth in dollar reserves elsewhere.
Maybe Brazil offset Russia. Most of Brazil’s reserves are in dollars, and Brazil’s reserve growth really picked up over the course of 2006.
But Brazil alone cannot explain the overall data. Moreover, Brazil’s reserve growth was concentrated in the second half of the year, and Russia’s initial diversification came in the first half of the year. My best guess is that some oil exporters – perhaps African oil exporters – report data to the IMF and hold a lot of their reserves in dollars. Oil shot up in the first part of 2006, and so did reserve growth in almost all the oil exporters.
I’ll put it another way. Either I am reading the COFER data wrong or some other emerging economy added an awful lot of dollars to their portfolio in 2006, offsetting Russia’s diversification.
And since we are not getting close to the end of June, I should soon have COFER data for q1 as well. I can hardly wait (seriously). The COFER data should tell us a lot about the global flow of funds in the first quarter.
30 Responses to “Reserve diversification — what does the IMF data tell us?”
First of all, the Gulf Arab State de-linking to the US dollar and China’s shift to a currency basket will, at the margin, require less dollar buying and ultimately less US Treasury Bond buying. A devaluation of the US Dollar may not impact the balance sheets of foreign central banks as severely as Western pundits argue. In recent years, foreign exchange insurance contracts in the form of currency derivatives have exploded in trading volume. A significant quantity of these currency derivative contracts have been marketed by US money center banks especially JP Morgan Chase and Bank of America. In conjunction with their accumulation of US Treasury securities and mortgage backed bonds, Foreign Central Banks have been aggressive buyers of these currency derivative contracts, protecting their investment capital from potential US dollar currency devaluation concerns. The Chinese PBoC has also been known to be a large purchaser of these currency insurance contracts to an unknown degree.
…and we all know how well derivatives provide perfect hedges with no counterparty risk whatsoever, esp when they’re needed most…
Hey Brad, do you have any comment on the Chinese MOF issuing $200MM of bonds to buy forex off the PBOC?
MoF bond issuance is part of the strategy of creating the investment fund. MoF sells RMB bonds. It gets RMB cash. the PBoC sells fx to the MOF (for the investment fund) for RMB cash. the PBoC pays down its RMB liabilities (sterilization bills) ….
in practice, i suspect that this will happen in a way that allows the pboc to sell fewer liabilities not pay down its existing liabilities, but it is all part of the same process. basically the investment fund is taking over some of the job of sterilization rapid foreign asset growth.
DC — so far, neither the Gulf nor China has really moved off the $. China’s reval/ basket 05 are more impressive than Kuwait’s 07 move, which isn’t saying much.
Who holds the rotting pile of sub-prime, “toxic waste” CDO paper?
A bunch of hedge funds may have problems, but that is the tip of the iceberg for “Titanic” Wall Street. Who holds the toxic tranches? Answer: the originating banks and syndicating investment banks for the most part.
As these lower-rated tranches retain the bulk of the credit risk in the mortgages, their retention by such banks means the much-trumpeted shifting of credit risk off balance sheets was less than met the eye. If the higher-rated stuff is worth 85-90 per cent of face value at best, what is the value of the $750bn of mortgage-backed securities said to be held in US commercial banks’ balance sheets?
The toxic tranches have been valued in recent days at prices as low as 60 per cent of face value.
If a fair proportion of $750bn is wiped out by mark-to-market – or the simple incidence of losses – that will be a fair proportion too of the commercial banks’ $875bn of capital. And how good are the balance sheets of the major investment banks?
…and that’s who Foreign Central Banks are (supposedly) buying “insurance” from…
“…China will find it in its interest to be a ‘bagholder of last resort’, purchasing a few assets at prices high enough to prevent cascading markdowns or defaults against margin lenders… China won’t buy anything directly…” http://interfluidity.powerblogs.com/posts/1182852363.shtml
“China has become a scapegoat for exchange rate misalignments, in our view.” http://www.morganstanley.com/views/gef/archive/2007/20070626-Tue.html
do you still like cervik? i would think that you would think his analysis is ‘off’ in that china and the GCC can both be singled-out as ‘misaligned’… more importantly tho, what do you think about the IMF’s “new surveillance system” within the context of WTO-sanctioned retaliation under the auspices of baucus-grassley-schumer-graham? i know you support “XR flexibility” in general (even as the US has achieved “fiscal consolidation,” at least for the time being), but do you endorse this implementation as a means of getting there?
cervik, apparently, does not; ostensibly because: “exchange rate surveillance and measuring currency misalignments could turn into a nightmare of theoretical uncertainties and political pressures, just as the Chinese case has so far shown us…”
i still like Cevik — on China, he is jsut deferring to Jen (whose fair value estimates were picked up by the economist as well). I disagree with the portion of the analysis that concerns china, but agree re: the gulf. and i do think the gulf shows more obvious indications of having an out of whack currency that China. I also agree with your point — the reality is that both the gCC and China are misaligned, as both followed the $ down when their respective fundamentals called for an appreciation.
don’t want to be pushy, and maybe you have reasons for not answering given your recent congressional testimony, but what do you think about congress ‘forcing’ the issue on “XR flexibility” thru the WTO and IMF?
“the reality is that both the gCC and China are misaligned, as both followed the $ down when their respective fundamentals called for an appreciation”
Why doesn’t anyone in Washington or Wall Street question the absurd “carry trade” that has pushed the yen to dangerously low levels. Oh I forgot, Wall Street investment banks enormously profits from the “yen carry trade” to finance every speculative investment under the sun, and Hedge fund political contributions ensure Washington refuses to address the yen currency issue. If the Washington Consensus was really so concerned about the Chinese yuan valuation, then put an end to the “carry-trade bubble” by Wall Street hedge fund speculators. With the Chinese yuan tied to a currency basket with a heavy Japan yen weighting, ending the yen carry trade will also revalue the Chinese yuan.
“With the Chinese yuan tied to a currency basket with a heavy Japan yen weighting”
I’d question that, like I’d question your assumptions on “currency insurance”
Congrats, DC. That last post managed to be entirely fact- and truth-free. The biggest driver of yen weakness is Japanese capital outflows. A simple glance at the performance of dedicated currency hedge funds will swiftly confirm that they have not had the yen carry trade in any meaningful size- else they would actually be making money. The Chinese currency “basket” is about as real as the Easter Bunny’s basket, as anyone who has tried to regress it has discovered. And they both are more realistic than the notion that funds are paying Congress to accept and endorse a weak yen.
Almost criminal fraud in the CDO paper and derivatives market
Investment losses at a little $20 billion hedge fund — and yes, in a $24 trillion bond market, this is a small fish — and Merrill Lynch’s (MER, news, msgs) insistence on an auction of some of that fund’s assets could make Wall Street admit that prices for trillions of dollars in assets are fairy tales made up in the backrooms of the investment banks themselves. Most immediately affected is the $2 trillion market for pools of securities backed by mortgages, corporate bonds and leveraged loans called collateralized debt obligations (CDOs), and by extension, the entire $30 trillion market for synthetic derivatives modeled on those pools.
That would require a massive re-pricing of portfolios all across the globe. It would turn some winning portfolios into losers and turn modest losses into debacles. It would force pension funds and insurance companies to make up massive shortfalls in the value of their portfolios. Some hedge-fund managers and Wall Street investment bankers, whose bonuses are determined by profits based on these fictitious prices, might see bonuses disappear completely.
“The biggest driver of yen weakness is Japanese capital outflows.”
Since when are you privy to the secretive world of non-transparent Hedge funds based offshore in the Carribean. And it isn’t the Yoshi family of Kyoto Japan that is borrowing trillions of yen and investing those proceeds in financial derivatives and options on Wall Street. The #1 auto manufacturer in the world, Japan’s Toyota, recently announced that it was discontinuing any further investment in US automobile production capacity. And finally, the current Governor of the Bank of Japan, Toshihiko Fukui, has called for raising Japan’s interest rates to stop the very real threat that the yen carry trade, in the hands of international hedge fund speculators, could blow up the world financial system.
“Toyota, recently announced that it was discontinuing any further investment in US automobile production”
If you’d kept up with this thread you’d know that, “Toyota’s North American and U.S. production capability is still ramping up, not leveling off. The North American and U.S. production capacity increases will continue through 2010″
macroman — the merill lynch study which looked at call money borrowing in tokyo by foreign banks with tokyo offices convinced me that someone does have a yen carry trade on, tho not necessarily the dedicated currency guys. foreign banks operating in japan – at least in 06 — were big net borrowers from the japanese banks, and big net lenders to their own branches in london, nyc and other big financial centers …
not all of these flows tho were directed at the yen/$ carry trade. there are some other attractive destination currencies …
if anyone knows the latest data on this series, do tell …
here’s a nice overview btw http://ipezone.blogspot.com/2007/06/baucus-grassley-schumer-graham.html – “it still sounds quite unwieldy in practice as it involves going back and forth across international bodies and gradually increasing sanctions. While I am sure that this bill or something like it aimed at China will gain support in Congress–likely by a veto-proof two-thirds majority in both houses–the practicalities of implementing it need to be subject to greater consideration for it to be a usable piece of legislation”
also see http://www.danieldrezner.com/archives/003345.html – “Here’s a multiple-choice question to the proposers of the new China bill: The American economy is experiencing rising interest rates and worries about rising inflation. Neither of these trends bodes well for average Americans. What’s the best way for Congress to exacerbate this trend?”
looking thru the archives, i like JW’s response http://www.rgemonitor.com/blog/setser/122419 – “Cheap goods and low interest rates. How awful!!!!”
and he also brings up a good point earlier, “If you make someone who is Chinese look weak, then it far more difficult to get them to do something. The game theory reason for this is that if you look like you are weak, you are just inviting more extreme demands. The problem comes in because this need not to look weak usually conflict with American political needs to make China look weak.”
so pros and cons on the adjustment path…
China Targets Interest Tax: China’s top legislative body reviewed a proposal authorizing the State Council to cut or abolish the 20% tax on interest income, a move aimed at curbing the exodus of funds from bank deposits to stocks.
Overseas Shifts in Treasury Piles May Help Fed: As Fed officials meet to discuss the direction of interest rates, they ought to consider again how foreign central banks are influencing the markets.
Brad, I don’t think it’s Brazil.
Brazil banks’ bets against dollar hit record high
SAO PAULO, June 27 (Reuters) – Banks in Brazil raised bets that the country’s currency will gain versus the U.S. dollar to a record high in May, central bank data showed on Wednesday.
Banks more than doubled short dollar positions to $15.79 billion at the end of May, compared with $7.52 billion at the end of April. The short positions were the biggest since the central bank began compiling the data in 1994.
A short position on the dollar is a bet that the currency will weaken.
Brazil’s currency, the real , gained nearly 9.4 percent in 2007 as exporters repatriated more dollars from overseas sales and as foreign investors poured cash in the equity and bond markets…
Sorry for this longish post. But it’s important. Translated from Le Monde into english:
Top official: without Iraqi oil, we hit the wall in 2015
In a stunning interview for the French (reference) daily Le Monde, Fatih Birol, the chief economist of the International Energy Agency (i.e. the intergovernmental body created after the oil shocks of the 70s to coordinate the West’s reaction to energy crises) effectively says that peak oil is just around the corner, and that without Iraqi oil, we’ll be in deep trouble by 2015:
“If Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there’s no need to be an expert”
And as long as the US occupies Iraq, production will not increase… Houston, we have a problem…
The whole interview is amazingly frank and free of diplomatic obfuscation. He blasts biofuels (“not based on any kind of economic rationality”), he notes that Africa is suffering the most already from expensive oil, he points out that even a slowing of China’s growth will not reduce oil demand, and he talks pretty explicitly about production peaks and depletion:
“Within 5 to 10 years, non-OPEP production will reach a peak and begin to decline, as reserves run out. There are new proofs of that fact every day. At the same we’ll see the peak of China’s economic growth. The two events will coincide: the explosion of Chinese growth, and the fall in non-OPEP oil production. Will the oil world manage to face that twin shock is an open question.”
He says it again twice in the interview: the gap between demand and supply will widen, and he blasts our governments for doing so little:
“Unfortunately, there’s a lot of talk, but very little action. I really hope that consuming nations will understand the gravity of the situation and put in place radical and extremely tough policies to curb oil demand growth.”
Of course, we might need to curb more than “demand growth”, and actually move to curb “demand” itself, but his words are at least quite direct and explicit. Even more interestingly, he puts the finger on two important but rarely discussed items: field depletion (he mentions an 8% decline rate for mature fields, but indicates that even a 1% difference in the actual number would mean huge volumes by 2020), and Saudi reserves:
“I understand the Saudi government claims 230 billion barrels of reserves, and I have no official reason not to believe these numbers. Nevertheless, Saudi Arabia – as well as other producing countries and oil companies – should be more transparent in their numbers. Oil is a crucial good for all of us and we have the right to know how much oil, as per international standards, is left.”
While not a direct attack on Saudi numbers, this is by far the most explicit voicing of doubt about their reserves from any official of a major organisation that I have ever read. “No official reason to doubt”??? That’s a pretty gaping hole there to sneak other kinds of doubts… He notes that he believes Saudi Arabian promises to be able to bring its capacity from 12mb/d today to 15mb/d in 2015, but notes at the same time that (i) it’s the only place in the world (other, potentially, than Iraq) where production can grow and (ii) it’s less than the expected demand growth by then from China alone.
While none of these facts should be surprising to my regular readers, it’s quite something else to see them explicitly stated by one of the top officials of one of the major energy watchdogs of the Western world.
The only question left is – will our governments listen, now?
It’s clear that this post was not mine:
Jerome a Paris (from DailyKos.com, TheOilDrum.com and Eurotrib.com).
He deserves it and much more.
whether or not ‘koteli’ is inferring that someone was borrowing his moniker, or that his post was borrowing someone else’s commentary, my only point in this comment being that everyone maintaining a long term hold on assets which are sensitive to the price of oil may, at least in part, be able to thank Mr. Chavez’s latest nationalization push for yesterday’s sudden change in the official outlook and market sentiment.
Unionized labour is getting the credit for the turnaround in metals markets: “…Strike action and threats of more industrial action in Latin America underpinned sentiment…” http://www.ft.com/cms/s/7bd43b48-2493-11dc-bf47-000b5df10621.html
Guest on 2007-06-27 16:09:04 – ‘i’ agree that MG’s perspective is worthy of more consideration, perhaps along with some discussion as to the various ways data and language may be structured, for what (presumably political?) purposes, to separate out Japan’, North American, Toyota and U.S. automobile production.
Guest on 2007-06-27 16:58:36 – Chinese authorities seem to be having enough of their own problems maintaining the strengths necessary to control their own constituency:
“…Most large banks in China, both international and domestic, are able to get around the country’s capital controls by taking foreign exchange deposits offshore and lending a corresponding amount in renminbi through their domestic operations, Mr Anderson said. “There is even a vibrant trade in bringing physical cash across the border from Hong Kong and Macao,”…” http://www.ft.com/cms/s/91b4a3b0-24d6-11dc-bf47-000b5df10621.html
“…The environmental activists behind the messages might have exaggerated the danger with their florid language… But their passionate opposition to the chemical plant generated an explosion of public anger that forced a halt in construction, pending further environmental impact studies by authorities in Beijing, and produced large demonstrations… It was a dramatic illustration of the potential of technology – particularly cellphones and the Internet – to challenge the rigorous censorship and political controls through which the party maintains its monopoly on power over China’s 1.4 billion people…” http://www.washingtonpost.com/wp-dyn/content/article/2007/06/27/AR2007062702962.html?hpid=topnews
to the point that they seem to be turning to ‘Westerners’ for help.
“…The News Corporation also entered an alliance with China Mobile, the state-owned company that is the world’s largest mobile communications operator. Mr. Liu of Phoenix said the move “could open a new, lucrative highway” to provide media content to China’s 480 million mobile-phone users. Wendi Murdoch has stepped up her role in China. She plotted a strategy for the News Corporation’s social networking site, MySpace, to enter the Chinese market, people involved with the company said. The News Corporation decided to license the MySpace name to a local consortium of investors organized by Ms. Murdoch. As a local venture, MySpace China, which began operations in the spring, abides by domestic censorship laws and the “self discipline” regime that governs proprietors of Chinese Web sites. Every page on the site has a link allowing users or monitors to “report inappropriate information” to the authorities. Microsoft, Google and Yahoo have made similar accommodations for their Web sites in China…” http://www.nytimes.com/2007/06/26/world/asia/26murdoch.html?pagewanted=4&_r=1&hp
“…Let’s say you are a businessman in Country A with manufacturing and assembly plants in China. If your Chinese subsidiary underpays for the materials imported into China needed to make your products and then overcharges for what is exported, you now have “excess” profits and therefore currency in China. You can take that money and invest it in the Chinese stock market, which is up almost 400% in the past two years, and 200% in the last year…” http://frontlinethoughts.com/pdf/mwo061507.pdf
“…Organised by text messages and internet chats, China’s middle classes are daring to protest, and giving the government a fright…” http://www.economist.com/world/asia/displaystory.cfm?story_id=9367055
“… Users rage against China’s ‘Great Firewall’…” http://www.cnn.com/2007/TECH/internet/06/19/china.great.firewall.reut/index.html
adjustment isn’t painless. yes, it involves higher rates (in all probability). but better to get started now than later — the longer we in the US are hooked up to the chinese interest rate subsidiy, the more difficult it is to end our addiction to that subsidy, and the more painful the adjustment.
but to be clear, adjustment involves:
a) higher prices for chinese and other goods (see rodrik tho on whether this leads to more inflation — it isn’t obvious)
b) lower prices on things we now export to china in exchange for those goods, and since most us exports = financial assets/ pieces of paper/ ious, that likely means higher rates
c) less consumption v. income growth
on the whole, going from spending more than you earn to spending what you earn isn’t necessarily fun/ pleasant. but it is something that is easier to do now than later, and it something that the us will eventually have to do — so in my view, get on with it.
the pros and cons of different adjustment paths = a subject well suited to earlier threads (i.e. the one on my testimony/ the one on my conversation with a PM)
um, you talkin’ to ‘me’ lemme deflect your attention to JW, who i thought brought up another good point:
“Enforcement [environmental, but also anything from food safety to securities] implies clean, fair, efficient bureaucracies and judicial systems, and clean, fair, efficient bureaucracies and judicial systems require money, which requires taxes, which requires a tax base, which requires a good economy.”