China's central bank needs a capital infusion.

[oddlots]

From the Times:

http://tinyurl.com/59k4qu

The capital base of a central bank is I suppose the reserves it holds for its member banks right? No more, no less. (About 3% of total assets or liabilities - can't remember which - of those banks no?) So not surprisingly they've lost huge ammounts on that buying US crap with it meaning that they are now underwater vis a vis what their obligations are to the member banks as a holder of their reserves. That's pretty funny actually. Kind of undercuts your credibility as a central bank. The parents blew their kids savings. (Putting aside the macro / trade benefits beyond the bank's balance sheet.)

But I'm still trying to figure out the takeaway. Seems to be basically... China's buying of US debt through central bank causing stress on the system... China's Central bank wants a stronger Yuan but its buying of US Debt (a Yuan weakening policy) means its political ability to pursue a strong Yuan policy (contra its own treasury dept) is weakened meaning... what?... we're going to see more Chines purchases of US debt as the Chinese Treasury dept would like?... It's like: I could sell some dollars if i could only stop buying them.

[c1ue]

Re: China's central bank needs a capital infusion.

Oddlots,

What you're reading about needs to be viewed in context.

China's CB (CCB) is doing what the Chinese government wants it to do.

Buying Treasuries has been a way of sterilizing incoming profits from manufacturers taking over the entire US (and Europe) manufacturing base.

This is how the bulk of the existing hoard came to be.

Read up on this 'sterilizing' operation in previous threads.

However, recently China has been allowing the yuan exchange rate to rise from the radically low (forced) rate it had been.

This doesn't mean the sterilization process has stopped, merely slowed down.

The yuan rate increase was hoped to offset some of the recent commodity price induced inflation.

However, the trouble now is that the CCB's hoard of US dollars (in various Treasury and bond forms) has been declining in yuan value. This puts the CCB close to technical violation of its charter.

The CCB could manufacture more yuan in various ways, but that would make inflation worse.

So the alternative is to play accounting games - but the China Finance ministry (which has the rest of the money) is a supporter for external trade, and likely won't freely cough up the beans (as in bean counters).

[GRG55]

Re: China's central bank needs a capital infusion.

From the Times:

http://tinyurl.com/59k4qu

The capital base of a central bank is I suppose the reserves it holds for its member banks right? No more, no less. (About 3% of total assets or liabilities - can't remember which - of those banks no?) So not surprisingly they've lost huge ammounts on that buying US crap with it meaning that they are now underwater vis a vis what their obligations are to the member banks as a holder of their reserves. That's pretty funny actually. Kind of undercuts your credibility as a central bank. The parents blew their kids savings. (Putting aside the macro / trade benefits beyond the bank's balance sheet.)

But I'm still trying to figure out the takeaway. Seems to be basically... China's buying of US debt through central bank causing stress on the system... China's Central bank wants a stronger Yuan but its buying of US Debt (a Yuan weakening policy) means its political ability to pursue a strong Yuan policy (contra its own treasury dept) is weakened meaning... what?... we're going to see more Chines purchases of US debt as the Chinese Treasury dept would like?... It's like: I could sell some dollars if i could only stop buying them.

This just shows the consequences of China's single-minded pursuit of a mercantilist trade policy.

This statement from the article...

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

...seems to indicate how naive China was to believe that it could maintain a perpetual "cheap Yuan" policy. China could not forever maintain (with Japan) the currency management policy that Don Coxe called "The Great Symbiosis" [his 2004 essay, attached to this post, is worth a re-read, especially now with so many calls of a dollar-bottom echoing through the canyons of Wall Street].

And like any financial policy, if a little bit is "good", more of the same must be even "better". So while the Chinese "resent their losses" and claim they were "lured" into buying US debt paper, in the next breath they plan to do more of the same [to "support the dollar" requires buying dollar denominated "foreign securities"]...

...Chinese officials have suggested in recent comments that they are increasingly interested in stopping the yuan’s rise, and thus are willing to continue buying foreign securities to support the dollar...

And one can only laugh at the results, so far, of the Chinese Finance Ministry flexing its muscles...:rolleyes:

...The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value...

The fiat currency race-to-the-bottom (competitive devaluation) is now on the backstretch.

[Supercilious]

Re: China's central bank needs a capital infusion.

There is a great blog entry on this subject from Michael Pettis (the whole page is worth reading):

http://piaohaoreport.sampasite.com/c...t-of-capit.htm

Many Chinese seem to be inordinately fond of conspiracy theories, but in this case it seems pretty obvious that if the RMB were indeed undervalued all these years – like the US government has been saying for a long time – then exchanging Chinese goods for massive amounts of US Treasuries by definition meant that China was subsidizing American consumption, and that this subsidy necessarily represented a loss for China. If you exchange something below its fundamental value for something above its fundamental value, it is only an accounting trick that allows you to pretend you haven’t booked a loss.

Revaluing the RMB does not create the loss. It simply forces recognition of that loss. And as long as China continues to accumulate US dollar assets purchased with undervalued RMB, the PBoC will continue to run losses, whether or not they are fully recognized. Perhaps you need to be a trader, and not a government official, to get the point.

The Chinese Ponzi style fast-development engine has started to have cam problems. Gee ... who could imagine that !!!???

[oddlots]

Re: China's central bank needs a capital infusion.

Thanks for the Coxe piece GR55. Found it very interesting to learn that the weak Yuan policy pre-dates the commodity boom:

"China and Japan have both historically focused on their
currencies' values in terms of exports of manufactured goods
and imports of raw materials.
Those policies made good sense through the
disinflationary/deflationary 1990s because the Triple Waterfall
Crash of commodities was in its final, prolonged cycle that
drove prices of energy, metals, and grains to levels that,
compared with 1982 prices, would have been inconceivable.
Although prices for finished goods were soft during the 1990s,
commodity prices fell far faster.

However, the terms of trade have turned decisively against
them. They can still price their manufactures favorably A currency policy conceived at a time of commodity
oversupply and commodity price weakness makes no sense
for China as long as the three economies of The Great
Symbiosis keep growing, guaranteeing that commodity price
rises will continue to far outstrip price boosts for finished
goods.The price gains seen to date for commodities will look
modest compared to the gains on the horizon as inventories
melt around the globe and buyers get increasingly desperate.
Enter "Chindia," economist Woody Brock's term for the two
nations who are undergoing a middle class revolution
involving a billion people. The only way to ensure China's manufacturers and electricity producers aren't hammered by
runaway commodity prices is to revalue the renminbi upward.
The only way a frozen renminbi can work to China's
advantage is if the Big Three economies falter and fall,
sending commodity prices back to,or below,1999 levels. And
the only way that is likely to happen is if The Great Symbiosis
unravels, triggering a global financial crisis. A frozen
renmimbi amounts to an expensive Put option on the global
economy.An upwardly revalued renminbi amounts to a cheap
Call option on the global economy."

That we've made it this far into the commodities boom without this blowing up seems incredible. The mismatch seems to be...

1) US needs a weak dollar to allow debt deflation to be eased by inflation
2) China needs a strong Yuan to stifle inflation but a weak yuan to maintain development

... or maybe this is really what's coming undone right now.

[GRG55]

Re: China's central bank needs a capital infusion.

If you exchange something below its fundamental value for something above its fundamental value, it is only an accounting trick that allows you to pretend you haven’t booked a loss.

The more intelligent members of OPEC have figured this out too.