POLITICS: China set to dump dollar reserves, page 1
Pages: <<  1    2    3  >>
ATS Members have flagged this thread 1 times
Topic started on 6-1-2006 @ 12:31 PM by Harlequin
China has spent many years actively buying US Dollars - at a massive rate. Currently they have around $800 billion , and this is set to rise to $1,000 billion this year. The main concern is, if they stop , then it could place alot of pressure on the dollar , and with the state of economy it could potentially break it; dumping the lot could start a downward spiral. There are calls by ecomomists to stop financing US borrowing and invest elsewhere.



www.msnbc.msn.com
WASHINGTON/SHANGHAI - China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback.

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to "improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets".


Please visit the link provided for the complete story.


China has been actively buying United States bonds and debt for the past few years at the rate of billions of dollars per month. This has held up the exchange rate of the US dollar. Without this the US dollar would have been in a free fall devaluation due to the enormous trade gap now set to reach close to $700 billion. It is still in the best interest of the Chinese to keep the dollar exchange rate high due to the fact that a dollar that is worth more allows the US to purchase larger quantities of products from Chinese manufacturers. The more we buy with a stonger currency the more cash the chinese government gets.

The chinese government also is removing the investment qouta from Chinese companies allowing them to aquire foreign commodities and assets.

The Chinese government also has close to the equivelant of $2 trillion in cash reserves.

What does all of this mean?

If the Chinese stop purchasing large ammounts of US bonds this will cause the dollar to devalue. This will cause a huge increase into the cost of importing goods. As our good Canadians can attest to buying something in the US and having it shipped to them. This will in turn cause a huge increase in inflation since nearly all products we buy today are imports. Without domestic suppliers we are forced to buy imports.

By removing the investment quota the Chinese government will now allow Chinese companies to purchase assets outside of China. Chinese companies with billions in cash reserves can easily buy whats left of US manufacturing allowing for Chinese owned companies operating in the US.

Better hope you have that hybrid car. The policy shift from purchasing US debt to commodities signals that the Chinese are ready to purchase vast ammounts of oil to fuel the growing economy of China. A massive purchase of oil will cause a huge increase in the price of oil as the supply shrinks. Having a vast ammount of oil reserves and a huge increase in price will only add to the Chinese bank.

A mass influx of Chinese cash reserves coupled with a dramatic decrease in the value of the dollar can lead to a situation where the Chinese could in effect purchase the United States. China has the rest of the world by its balls and is beginning to squeeze.

Or they may just continue to buy US debt and things will be peachy for a little while longer.


[edit on 6/1/06 by Harlequin]


reply posted on 6-1-2006 @ 08:49 PM by AceOfBase
This wont hurt the US too badly right now as the US dollar was trading a lot higher in 2005 than it was in 2004, although still not as strong as it was in 2000.

The US dollar is still way at the top in Forex reserves.
IMF Currency Reserves data (PDF)



The Forex markets are more concerned about US GDP and unemployment figure than they are in China's currency reserves.

I think only a change by OPEC is going to have a real disasterous effect.

Both GDP and unemployment numbers are strong right now.
Only 4.9% unemployment in December.


reply posted on 7-1-2006 @ 03:00 AM by subz
Its a bit late to be getting angry at the Chinese. The U.S government should of had alarm bells ringing when they were gleefully allowing the Chinese government to gobble up hundreds of billions of U.S dollars. Could they be that short-sighted as to not see how dangerous it was to take the short term benefits of propping up the dollar by selling an acknowledged rival the proverbial executioners axe?

Now some believe punitive action is warranted against China if they were to dump THEIR American dollars. Let's not forget this is Chinese money, not American. The currency maybe American made but it is now China's assets. They are able to do as they wish with their own property. It's far too late to bemoan the stupidity that allowed the Chinese to horde nearly US$1 trillion, and its not the Chinese who should be the focus of your anger.

For what its worth though, I subscribe to the view already mentioned here that a damaged US economy is not good for China's economy. It's correct that the US is all but one of many markets the Chinese sell too but the nature of the World economy is solidly pegged to the performance of the US economy. If the US economy collapses you can guarantee a World recession/depression. That will kill off most economies in the World and leave China no one to sell to.

Short term benefits for China dumping all this currency are not too great. However, longer term benefits would be a severely weakened America, including her allies, which would allow for China to spend its newer foreign currency on expanding militarily. Military expansion including both buying more hardware and perhaps invading Siberia and South East Asia. It may not be a good move for China's economy but it would do wonders to fund any military expansion or conflict with the United States.

[edit on 7/1/06 by subz]


reply posted on 7-1-2006 @ 03:55 AM by Xerrog
If you are looking at this as if China is happy to sit back and grow slowy feeding off of America then no in the scenario they won't dump the cash.

As others have said though it is somewhat narrow minded to view this only from a economical stand point. At the same time China is hoarding US dollars it is buildilng its military assets.

Many of China's Oil interests are rather well protected from US dollar problems and the early impact they would make. This is becomming ever more true with the passage of time.

In chess and in life you need to think several steps ahead of your competitor. China has decently known ambitions to expand outside of its current borders both short term and long term.

So with that would this be possible?...

China and her "friends" shore up their oil supplies from taking a pounding during a US economic downtime.

China and her "friends" build up enough military might to expand outside of it's borders if no fear of US intervention.

China by this time has built up $1tril+ USD.

China at the same time dumps the USD and ramps up procurement of oil.

This would have the effect of crippling a already fragile US economy, force the US to release strategic oil reserves for civilian use, and in many area's deploy national guard to keep the peace.

Admist this I do not beleive the US would be able to respond to chinese aggresion especially if it was swift.

Then again as we all know this isnt a one on one chess match. Its even more then one match at once. Thought while simplistic I do think my scenario is more then a little possible.
Pages: <<  1    2    3  >>    ^^TOP^^



Russian scientists reach buried Antarctic Lake Vostok
  Posted 7 days ago with 83 member flags
Renowned Geophysicist Says Strange Sky Sounds Are Real
  Posted 2 days ago with 74 member flags
Monsanto quits as GM results announced (EUROPE)
  Posted 8 days ago with 72 member flags
Ayatollah: Kill all Jews, annihilate Israel
  Posted 7 days ago with 49 member flags
Is it morally wrong to take a life? Not really, say bioethicists
  Posted 14 days ago with 37 member flags