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December 15, 2004
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The Chinese value of a dollar
In a piece titled Five hows and whys about China's foreign exchange the People's Daily lays out China's official position on forex issues. Bear in mind that the very last people to admit to any change in policy will be the Chinese Government itself. That said, some interesting points... Q: According to the report from the web there are several hundreds of billions or even trillion of US dollars of international hot money which are now gambling on the revaluation of the People's Currency, is it true or not?In other words the rorting has been domestic in nature, and China sees little impact from hedge funds and speculative money. Combined with a financial system full of bad debts, they aren't in a hurry to fully liberalise the capital account. Now for the juicy bits: Q: According to the foreign media China has reduced and sold out a lot of USD capitals in the management of foreign exchange reserve? I would like to ask whether the case is true or not?Brad deLong has had a look at the "cost" of supporting the renminbi. What's clear from the official statement is that China sees its reserves as a macro-economic insurance policy. They aren't too concerned if the US dollar loses value, because most of its trade is denominated in US dollars. Effectiively the Chinese economy is a dollarised one. So long as the majority of its trade continues to be denominated in US dollars (and note that's not the same thing as only trading with the US) then its forex reserves are no problem. If China is prepared to continue investing in Treasuries it might even allow other central banks to diversify away and allow a relatively painless drop in both the US dollar and US Treasuries. China is not looking at its foreign reserves as an investment. It is looking at them as insurance. posted by Simon on 12.15.04 at 09:56 AM in the
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Comments:
What is "rorting"? Is it possible to use that word in a non-economic context? posted by: Matt Waters on 12.15.04 at 01:55 PM [permalink]Rorting is ripping off, gaming the system. posted by: Simon on 12.15.04 at 02:01 PM [permalink]Got it. posted by: Matt Waters on 12.16.04 at 12:26 PM [permalink] |
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