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  • Beijing swells dollar reserves through stealth

    http://www.telegraph.co.uk/money/mai...ccchina126.xml

    Beijing swells dollar reserves through stealth
    Last Updated: 12:31am BST 26/08/2008

    Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard

    China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

    A study by HSBC's currency team in Asia has concluded that China's central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.

    Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

    This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

    "China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June," said Daniel Hui, the bank's Asia strategist.

    Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign "hot money".

    Given the sheer scale of China's foreign reserves - now $1,800bn (£970bn) - any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.

    There is little doubt that the key driver behind the wild currency ructions this summer has been the blizzard of dire data from Britain, Europe, Japan and Australasia. The mounting danger of a full-fledged recession across the club of rich OECD nations appears to have caught the markets off guard.

    The closely watched Dollar Index reached an all-time low in March. It crept up gradually in the early summer before smashing through resistance in July.

    The world's currency system is swivelling on its axis. Central banks in Asia and Europe have stopped raising rates, and some have begun to cut aggressively. The Federal Reserve is no longer nakedly exposed. Indeed, investors are already starting to look ahead to the next round of Fed tightening.

    The 18pc slide in oil prices from a peak of $147 a barrel in July has added juice to the dollar rally. Russia and the Middle East petro-powers tend to recycle a high proportion of their vast earnings from oil into the eurozone, either by purchasing European bonds or expensive imports.

    A Bundesbank study found 40 cents of every dollar spent by eurozone countries on oil imports comes back again one way or another. The figure for the US is just 10 cents. This trade bias has given oil a new character as a sort of anti-dollar driving the currency markets.

    Even so, the China effect is a key ingredient in the dollar comeback. Beijing's Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country's manufacturing hubs eats away at profit margins.

    "They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view," said Simon Derrick, exchange rate chief at the Bank of New York Mellon.

    China's PMI purchasing managers index fell below 50 for the first time in July, signalling an outright contraction in manufacturing output. Hong Kong's economy contracted 1.4pc in the second quarter. The Politburo has rushed through special rebates for textile producers now caught in a ferocious downturn.

    Much of the clothing, footwear and furniture industry has been hit, leading to mass plant closures in the Pearl River Delta.

    "During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work," said the National Development and Reform Commission. "Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy."

    Last week's rebound on the Shanghai stock market stalled on fading hopes of a fiscal stimulus package. "It is unrealistic to expect the government to rescue the market," said Li Ka-shing, chairman of Hutchison. "Speculators should be very cautious now. The worst is not over in the global credit crisis."

    Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a "vicious cycle". House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China's population.

  • #2
    Re: Beijing swells dollar reserves through stealth

    There's a good treatment of this via Brad Setser. He calls it the Quiet Bailout:

    http://tiny.cc/zwg2J

    Add this to Bart's comments about the actions in the ESF (Exchange Stabilisation Fund) and the Special Drawing Rights of the IMF here:

    http://tiny.cc/uxYLt

    ... and its not surprising that Macro Man is scratching his head:

    "One of the things that Macro Man does in his real job is to run indicators that attempt to determine which fundamental themes are driving currencies at any point in time (don't ask, he's not going to be more specific than that.) And what's interesting about the recent dollar move is that none of the fundamental themes that traditionally drive exchange rates has been in play during this dollar move.

    This morning he quantified this into a combined "thematic strength" indicator, wherein a high reading indicates that currency markets are trading very thematically, and a low reading suggests that so-called fundamentals are not driving FX.

    And what we can observe is that this is the least thematic market since the summer of 2003. It appears to have been micro (idiosyncratic decisions and/or momentum), rather than macro, that has driven the recent dollar rally. So if you've struggled to understand why the buck is up, don't worry; it's taken a lot of people by surprise."

    From: http://macro-man.blogspot.com/2008/0...inancials.html

    At the same time I thought Macro Man did a good job of outlining the "legitimate" reasons for dollar strength here:

    http://tiny.cc/NbNo3

    Comment


    • #3
      Re: Beijing swells dollar reserves through stealth

      So long as China is buying dollars to depress the Yuan in order to create jobs in China, everything is beautiful with the US dollar--- at least short to medium-term. And Saudi Arabia is pumping more oil with Kuwait probably pumping more too.

      I can NOT see gold rising for very long under these circumstances.

      Of course this is competitive devaluation, and long-term this is bullish for gold. But short to medium-term fundamentals always out-weigh long-term fundamentals.

      On the gold market, the medium-term trend is down. The gap lower under $860 is now being filled on the charts. I look for lower gold ahead with these fundamentals and technicals.

      Gold has a history of confounding bulls, so expect gold to rally, over and over and over and over again---- but go no-where. This is classic bear market gold trading.

      And if gold doesn't break far above $1000, gold is going no-where. Correct?

      Always keep your core position in gold, but I wouldn't be adding to that position just yet. Bear markets die of exhaustion, so be plenty pacient before you buy into any bear.

      Remember that gold pays no dividends, so you had better be buying gold plenty cheap. And $800+ or $900+ gold is NOT cheap.
      Last edited by Starving Steve; August 26, 2008, 03:54 PM.

      Comment


      • #4
        Re: Beijing swells dollar reserves through stealth

        Originally posted by Starving Steve View Post
        So long as China is buying dollars to depress the Yuan in order to create jobs in China, everything is beautiful with the US dollar--- at least short to medium-term. And Saudi Arabia is pumping more oil with Kuwait probably pumping more too.
        What about this little item?

        Kuwait to deport 800,000 foreign workers

        In corporate terms, the question is why is Kuwait laying off 1/3 of its work force? Where is the cash crunch? Bad Investments?

        Comment


        • #5
          Re: Beijing swells dollar reserves through stealth

          Originally posted by Rajiv View Post
          What about this little item?

          Kuwait to deport 800,000 foreign workers

          In corporate terms, the question is why is Kuwait laying off 1/3 of its work force? Where is the cash crunch? Bad Investments?
          Could be Iraq-related biz...

          Comment


          • #6
            Re: Beijing swells dollar reserves through stealth

            Originally posted by Rajiv View Post
            What about this little item?

            Kuwait to deport 800,000 foreign workers

            In corporate terms, the question is why is Kuwait laying off 1/3 of its work force? Where is the cash crunch? Bad Investments?
            Didn't I just read somewhere that they are trying to build railroads to Israel and China? Doesn't make sense.

            Comment


            • #7
              Re: Beijing swells dollar reserves through stealth

              Originally posted by tombat1913 View Post
              Didn't I just read somewhere that they are trying to build railroads to Israel and China? Doesn't make sense.
              There is much about that region that "doesn't make sense" when viewed through "western" eyes.

              This is just another manifestation of the slow shift to conservative Islam the region has been undergoing for nearly 3 decades (next year will mark the 30th anniversary of the Islamic Revolution in Iran...time sure flies.). This process accelerated in the aftermath of the first Gulf War, as the various Gulf nations watched their economies almost collapse with the sudden mass exodus [after Saddam invaded Kuwait] of professional expatriates upon which they had become so dependent.

              With the notable exception of Dubai, an extraordinary xenophobia is decending across that region [and IMO this is the biggest threat to Dubai's continued "success"]. With the [more or less] permanent removal of the threat from Saddam, and now drowning in petrodollars, the Kuwaitis have much more latitude to ignore US-led demands for such funny ideas as "democracy" and female political emancipation.

              When you hear these sorts of words being applied to 800,000 guest workers, it makes more sense when taken in the context of the secular shift that has been long underway...
              "...The expatriates are to be sent home for committing crimes, being trouble-makers, importing infectious diseases and being marginal laborers, the newspaper said without identifying the source of the information..."


              Last edited by GRG55; August 29, 2008, 07:24 AM.

              Comment


              • #8
                Re: Beijing swells dollar reserves through stealth

                But GRG,

                The question still remains -- What impact will firing 1/3 of the labour force have on Kuwait's economy -- Does Kuwait plan to hire replacement workers from else where? and after such a deportation order, will they even come? Or will others, seeing the writing on the wall, leave for greener pastures? From what I have gathered, other than the money, being a worker in Kuwait is no picnic, unless you are from middle layer of management/technical work force that keeps Kuwait running.

                Comment


                • #9
                  Re: Beijing swells dollar reserves through stealth

                  http://www.atimes.com/atimes/China_B.../JD08Cb01.html

                  Strong yuan may be China's savior

                  Currency Wars (Huobi Zhanzheng), a book written by a Chinese native who lived in the United States and worked on Wall Street, has become a runaway bestseller in China in the past nine months [2]. The book caused a sensation of interests and heated discussions in Chinese cyber space and other media on Western intentions behind its demand that China quickly appreciate the value of its currency

                  Comment


                  • #10
                    Re: Beijing swells dollar reserves through stealth

                    Originally posted by Rajiv View Post
                    What about this little item?

                    Kuwait to deport 800,000 foreign workers

                    In corporate terms, the question is why is Kuwait laying off 1/3 of its work force? Where is the cash crunch? Bad Investments?
                    What was the effect from dropping the dollar peg last year on Kuwait's economy?


                    Kuwait drops dollar peg

                    Published Date: May 21, 2007

                    KUWAIT: Kuwait unshackled its dinar from the tumbling US dollar yesterday and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray.
                    http://www.kuwaittimes.net/read_news...Y5MTY4MDA2MA==

                    Comment

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