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CFR:Could China Have a Reserves Crisis?


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http://blogs.cfr.org/geographics/2016/02/10/chinareserves/

Could China Have a Reserves Crisis?

China-reserves.png

Last summer, U.S. lawmakers were condemning China for pushing down its currency, arguing that it was still “terribly undervalued.” But those days may be long gone. Chinese and foreigners alike have been stampeding out of RMB, leaving the Chinese central bank struggling to keep its value up and prevent a rout.

The People’s Bank of China has been selling off foreign currency reserves at a prodigious rate to keep the RMB stable. At $3.2 trillion, China’s reserves still seem enormous. But they are down $760 billion from their 2014 peak, and $300 billion in just the past three months. As shown in the figure above, at the current pace of decline China’s reserves will, according to the IMF’s framework for reserve adequacy, actually fall to a dangerously low level in the spring. This means that China would be at risk of a balance-of-payments crisis, unable to pay for essential imports or service its dollar debt payments.

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They can liquidate the tbills, but that would drive the dollar down and make the yuan more expensive, which is what they're trying to avoid, despite the inevitability.

 

They've actually been selling US treasuries.  They're don't want to drive down the value of their other US treasuries and dollar.

 

http://www.cnbc.com/2015/10/14/what-china-selling-us-treasurys-really-means-commentary.html

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The conspiracy theorist in me wants to believe that we are doing this to them so they don't overtake us as a world power or to relieve our own debts and prevent our own financial crisis.

 

 

This is a pretty normal thing..  When immerging  economies first begin to make the transition to mature economies they encore 20-15-10% growth which cover up all their systemic problems..  Growth like that is very forgiving..   But at some point they hit a wall and actually have to make due with the growth associated with a mature economy which is 2-3%..  4% is considered great growth for a mature economy....

 

China is getting hit by a trifecta of problems..   They are kind of doing it to themselves by trying to do four things all at once and in a few cases working against their own interests..  (1)They want to be a world reserve currency,  but they refuse to let their currency float.    (2) They love their stock market as a way to transfer and diversify wealth,   as a symbol of how great their country is every time their indexes go up, but they refuse to let their market self correct and keep pumping billions into it to ensure nobody looses money.  (3)  They've picked the exact wrong time to try to make the transition from an export driven industrial economy to a service based economy which can self sustain it's own growth..    Given they are doing all three of these difficult tasks at the same time economists are thinking two years of zero growth and they are already leaking reserves.   

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