Stephen Roach: China Loses Trust in US Economic Stewardship!
- The Chinese are in trouble and they know it. How do they get rid of their US$1.5-2T of USD denominated reserves? What market in the world can absorb such a large amount of money? The answer is there is none except for the US treasury market. The Chinese are caught in a web of their own making. They have maintain an exchange rate which is great for their export competitiveness and employment level but they have accumulated this great gob of USD. And these trillions of dollars may just become worthless overnight. When they start to dump the USD, it is Armageddon for the world and they know it!
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China loses trust in US economic stewardship
By Stephen S. Roach, http://gulfnews.com/
Asian giant to say no to dollar dominance!
New Haven: The Chinese have long admired America’s economic dynamism. But they have lost confidence in America’s government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.
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Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”
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China is no innocent bystander in America’s race to the abyss. In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion (Dh11.74 trillion) in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total — around $2 trillion — is invested in dollar-based assets, largely US Treasuries and agency securities (ie, Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.
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Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.
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Those days are over. China recognises that it no longer makes sense to stay with its current growth strategy — one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves. Three key developments led the Chinese leadership to this conclusion:
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… for the full article click here!
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