POLITICS: China set to dump dollar reserves

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.



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]

This has inspired me...

I would like to promote a program of increasing our farming, for export to china.

Recently a Chinese General commented that China will need more natural resources and food to feed its growing population...

so why dont they buy some natural resources/food from their leading customer- US (better than paying our farmers not to grow food)

To those that dont know, they have also been artifically stimulating the price of steel, due to massive purchases of scrap metal from the US.

Which in turn, has made it even harder for other manufacturing economies to compete (like india)

China is being selfish, and the result will be a world turning its back upon them. probably after many countries experience the same financial disaster that the US faces...

There is a good compromise, that will make all happy, but it will come from China realizing that it has to pay for its growth, not go to war over it...

And Bush just said that ""In 2005, the American economy turned in a performance that is the envy of the industrialized world."

Although he forgot to mention that we are several trillion dollars in debt, that the trade deficit is the biggest it has been in the history of this country, that the US economy is a fallacy based on the fact that half of our economy has been borrowed from the rest of the world.

Yeah...we're the envy all right...

Possibly a Chinese plot to "crash" the US economy just prior to reunification with Taiwan? or maybe even some further expansionist scheme ?

Possible, but they economic growth has been fueld by and large by the US consumer (also an abundance of cheap labor). If they stop, thier imports will also go down as segements of the US population will be unable to purchase good being made in China even at rock bottom prices.

So yes it would put a huge strain on the US dollar but it would also hit China as well.

In the context of taiwan, yes it could be part of an overall strategy, but, the US still maintains superpower status bad economy or not. This exact same strategy played out in the 80's. Remeber when Japan Inc was going to take over the world?

China has a huge environmental problem as well as population issues.
1) Contaminated environemnt that is getting worse in some areas.
2) A huge population that will get old. Much of this huge economic growth has been fueld by ultra cheap labor (Be it prison or otherwise) the population controlls coupled with a desire for male children (AN imbalance has been created) means that this abundant cheap force may not be there down the road. Africa is being groomed as the next "China" in terms of production and cheap labor. (Why do you think there is all of this "sudden" concern with helping out Africa with its AIDS problem et al.

Well when ALL Iranian Oil is (4th largest depositis in world) switched from dollar to European trading in a month or two in addition, also the US housing market is slowing down with a fall expected within the industry, in addition higher Oil costs and therefore manaufacturing, with Bushs War costs. To be honest you dont need to be an Economis the writings on the wall for the next year or two, and that truly is more than an educated guess.


Regards

Elf

PS watch March/April for Stock Falls and inflation. sadly.

Hmmm, I was under the impression that Iran was going to trade in the "Spot Market" in Euros not dollars, not OPEC.

One thing to remember that Europe economy has gotten a boost from the dollar trading in oil since the Euro is strong compared to the dollar. So thier economies may take a hit as well.

At anyrate, the US is due for a serious economic downturn eventually. Consumer debt is at record highs in addition to the budget deficits being run up. At some point something has to give.

My family is well prepared for any eventuality from a economic standpoint at least. No short term debt only one mortgage and we work in health care which is resonable safe from major downturns

Yes so a contaminated Enviroment leads to need or want for Expansion from these areas.

The Aging population isnt a now problem its a later problem.

Lots of young men.

So they currently have a very large young population with excess males, perfect for Military expansion ?

Yes i agree Africa is being groomed, but not so much as India will be i think.
I bet we see US getting closer and closer with India.

FredT Im glad you and yours are protected a little, I meant spot price but still will be significant change in daily trade in dollars.

Oil is just going to keep rising too, with the massive knock on effects to all costs, and cut in profits, another thing that is changing in the big picture globaly is the insurance industry, which has knock on effcets on guilts, bonds etc...

But the real concern is that the US and UK economy have lived off remortgaging and releasing equity from their properties to fund purchases and keep growth in and a (apparently) strong economy. That is now coming to an end and with unsecured loans being soo large. Well.

Anyhow as the Pros do they will make money off the tears of the bankrupt citizens: (from some time ago and therefore more scary as very close!)

The US Real Estate Kings View

Hey guys just do a search and look wher Gold and Precious metal is going? alternative investements, thats where the 'old money' go just before a correction to make a killing back in real estate after the dust has settled.

Regards

Elf

ATSNN

edit: elfspelling and link


[edit on 6-1-2006 by MischeviousElf]

That article about Tom Barrack was interesting, see he is only now investing in Casinos, a typically recession proof industry, infact CAsinos do very well in recessions as people come desperate for mony and become high risk bet black or red type investors .

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.

You do make a good point Ace. US unemployment is really low especially when compared to some fo the EU countries.

Take France for example is 2X that of the US

Unemployment held close to a five-year high of 9.9 percent in December, the government said Friday. Households' purchasing power will probably grow more slowly in the first half than in the second half of 2005 because of higher payroll taxes to finance a reform aimed at plugging the national health-care system deficit by 2007, Insee said Dec. 16.
France

I think the point people are making is that the booming economy is Fuelled (in most of the west) by borrowed money from a massive housing price boom.

A possible dangerous situation ?

When I came upon this thread, I thought to myself, this goes back to when California had its assault weapons ban i.e. ak-47, although the SKS, same weapon different stock was still being allowed to be sold under the exceptions rule of sporting rifle.

This is an attempt to devalue the dollar to put the cheap dollar store merchandise, assembled in China with American made products or as leverage to purchase quote necessities like food, energy, technology.

China's next move like with Japan, England and others to purchase real estate heck the Queen of England OWNS 12000 acres in Kentucy. Unlike Mexico where you must be a natural born citizen or naturalized to own real property in that country. That is what is next. Ownership of the land by foreign citizens and corporations. Cordially, LEGALCATALYST

I don't understand the problems you have with this news. In fact for me it is excelent news. After China dumps the dollar, US can simply punish them by setting embargo on all chinese goods. This will completely criple chinese economy. And if the price of imported oil increase, it would be excelent news too. At least it will allow to extract hydrocarbons from domestic resources (from coal - US has largest coal reserves in world), oil shale (again there is more oil in US oil shales than whole world crude oil reserves1600 billion barrels)of couse in short term it can hurt US economy, but remeber that it will also cut US trade deficit and increase US imports = that means increase employment and revive domestic industry.
And that Chinese have cash and they could buy US? HAHA. In case the US govt feels threatened,.hey will simply not allow them to buy anything there
I only hope it will start soon.

Originally posted by longbow
I don't understand the problems you have with this news. In fact for me it is excelent news. After China dumps the dollar, US can simply punish them by setting embargo on all chinese goods. This will completely criple chinese economy. And if the price of imported oil increase, it would be excelent news too. At least it will allow to extract hydrocarbons from domestic resources (from coal - US has largest coal reserves in world), oil shale (again there is more oil in US oil shales than whole world crude oil reserves1600 billion barrels)of couse in short term it can hurt US economy, but remeber that it will also cut US trade deficit and increase US imports = that means increase employment and revive domestic industry.
And that Chinese have cash and they could buy US? HAHA. In case the US govt feels threatened,.hey will simply not allow them to buy anything there
I only hope it will start soon.

This is argument is majorly flawed because you make it sound like the Chinese wholely rely on the USA economically, when infact every country has there shelves stuffed full with low cost Chinese product.

Would the USA even impose a trade embargo on another country for dropping its US cash reserves ? especially a country that can supply consumer products for 1/10th of the home made price ?

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]

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.

There is also the possibility that a small level of currency dumping will lower the value of the dollar and allow US and Chinese exports to both grow. A lower dollar value actually helps many US manufacturers. Since the Chinese still have their currency somewhat pegged to the dollar, they get an advantage as well when the dollar drops (I think unless that has changed).

If Americans were really concerned about not buying products made in China all they have to do is start checking the small print and avoid many products sold at Walmart. I read or heard last year that Walmart imports about 10 percent of all US imports coming from China. I doubt most Americans will do this since the Chinese products are often cheaper than the similiar American product.

There is a major problem though if our currency drops too far or too quickly I believe. Gas prices will likely shoot back up IMO and that helps cause inflation in our economy. The solution I believe is for our government to cut spending. I haven't seen too much of that happening within our government though. So the Chinese have 1 trillion in reserve? They don't need to invade Taiwan anymore, they can just buy it.

Originally posted by NumberCruncher


This is argument is majorly flawed because you make it sound like the Chinese wholely rely on the USA economically, when infact every country has there shelves stuffed full with low cost Chinese product.

Would the USA even impose a trade embargo on another country for dropping its US cash reserves ? especially a country that can supply consumer products for 1/10th of the home made price ?

Whole chinese economic growth equals US/China trade deficit. Without US trade they will have no growth and their whole east coast would be haevily hit. Also they now have only 30bil. $trade surplus, without US trade it would be almost minus 150 billion $. And cheap consumer products can be imported from Vietnam, Philipines, Thailand or Latin America, don't make it looks like only China is able to produce cheap crap.