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Re: China says lending to US will not go on forever
commentary by Satyajit Das very relevent to issues raised by symbols
In order to avoid increases in the value of the Renminbi that would affect the competitive position of its exporters, China undertakes "currency sterilization" − operations where it issues bonds to mop up the excess liquidity. China incurs costs – effectively a subsidy to its exporters − of around $60 billion per annum (the difference between the rate it pays on its Renminbi debt and the investment income on its reserves).
The dollars acquired are invested in foreign currency assets, around 60% in dollar-denominated U.S. Treasury bonds, government-sponsored enterprise (GSE) paper such as Freddie and Fannie Mae debt, and other high quality securities. China is exposed to price changes in these investments and currency risk because of the mismatch between foreign currency assets funded with local currency debt.
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It is also not easy to tap this liquidity pool. Given the size of the portfolios, it is difficult for large investors such as China to rapidly mobilize a large portion of these funds by liquidating their investments and converting them into the home currency without substantial losses. This means that this money may not, in reality, be available, at least at short notice. If the dollar assets lose value or cannot be accessed, then China must still service its liabilities. It can print money but will suffer the economic consequences including inflation and higher funding costs.
[..]
China and other emerging countries with large reserves were motivated to build surpluses in response to the Asian crisis of 1997-98. Reserves were seen as protection against the destabilizing volatility of short-term capital flows. The strategy has proved to be flawed.
It promoted a global economy based on "vendor financing" by the exporting nations. The strategy also exposed the emerging countries to the currency and credit risk of the investments made with the reserves. Significant shifts in economic strategy are likely.
commentary by Satyajit Das very relevent to issues raised by symbols
In order to avoid increases in the value of the Renminbi that would affect the competitive position of its exporters, China undertakes "currency sterilization" − operations where it issues bonds to mop up the excess liquidity. China incurs costs – effectively a subsidy to its exporters − of around $60 billion per annum (the difference between the rate it pays on its Renminbi debt and the investment income on its reserves).
The dollars acquired are invested in foreign currency assets, around 60% in dollar-denominated U.S. Treasury bonds, government-sponsored enterprise (GSE) paper such as Freddie and Fannie Mae debt, and other high quality securities. China is exposed to price changes in these investments and currency risk because of the mismatch between foreign currency assets funded with local currency debt.
[..]
It is also not easy to tap this liquidity pool. Given the size of the portfolios, it is difficult for large investors such as China to rapidly mobilize a large portion of these funds by liquidating their investments and converting them into the home currency without substantial losses. This means that this money may not, in reality, be available, at least at short notice. If the dollar assets lose value or cannot be accessed, then China must still service its liabilities. It can print money but will suffer the economic consequences including inflation and higher funding costs.
[..]
China and other emerging countries with large reserves were motivated to build surpluses in response to the Asian crisis of 1997-98. Reserves were seen as protection against the destabilizing volatility of short-term capital flows. The strategy has proved to be flawed.
It promoted a global economy based on "vendor financing" by the exporting nations. The strategy also exposed the emerging countries to the currency and credit risk of the investments made with the reserves. Significant shifts in economic strategy are likely.
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