While Washington officials give speeches accusing the chinese government of accumulating vast reserves to manipulate their currency, the real culprit is just down the street at the Federal Reserve. According to the April 28 issue of the Fed’s report H.4.1, Factors Affecting Reserve Balances, on Wednesday, April 27, the Fed owned $718.6 billion of U.S. treasury securities, considerable above the $659.1 billion in reserves owned by China at the end of March.
Manipulator!
The Fed would say, of course, that they don’t own the securities to manipulate the dollar, they own then to manipulate bank reserves. It is how they control the growth in the supply of credit and various measures of the money supply for the U.S economy. They are correct. It is also correct that China does so for exactly the same reason.
This is all moot. U.S. pressure has already forced Chinese policy to change. The yuan actually broke through the fixed band of +/- 0.3% for twenty minutes on Friday. A revaluation could come next week, a holiday period in both China (May holidays) and Japan (Golden Week.) I am just sure that George Soros is licking his chops waiting for this one.
There is a serious use for the Chinese resrerves. According to a Standard & Poors report released yesterday, the recapitalisation of the Industrial and Commercial Bank of China and the Agricultural Bank of China, two of the country’s largest lenders, could cost Beijing up to $190B. They have used used capital injections from foreign exchange reserves before as a way to make banks more attractive to (foreign) strategic investors. (Last year, Beijing transferred $45bn from its foreign exchange reserves to BoC and CCB.)
There may come a day soon when we are very happy the Chinese central bank has all those reserves.
JR
Thanks for writing Lucy. And for the tip on the book. I will buy The Orientalist and read it right away. And I think you are right to try and connect the dots between economic events and political echoes. I think this China thing is going to end with a major collision.
JR
Dear Dr. Rutledge:
Having recently read ‘The Orientalist’ by Tom Reiss and liked it very much (oil boom in Baku in the late 1800’s- early 1900’s, drawing the Zoroastrians to the spontaneous combustion oil fires and other exotic tales, leading to the Russian Rev. and the emigration to Europe of so many peoples, leading to concentration camps and WW II), your remarks on the general population here losing out on the job front to the Asian markets and our corporate and private investment in them is such a recipe for upheaval and potential mayhem down the road…meanwhile, seniors and savers here suffer from low interest rates and insufferable complaints that we do not ‘save,’ which would be true since the Fed’s rates do not pay us to save, plus the rising food, taxes, housing, and energy prices the Fed doesn’t count make saving harder, large agribusinesses using illegal, less expensive labor when our citizens could use the jobs and higher wages (back to backyard and allotment gardens and home canning if food prices rise) etc. etc. etc. If we make it through Greenspan’s term and get someone next who is not his clone ( Hubbard perhaps instead of Bernanke), maybe we have a chance to make it through. Otherwise, forget it- it’s a house of cards.