Friday, April 29, 2011

China borrowing dollars to support their currency?

As usual, Warren Mosler saw this before anyone else. In a post yesterday he talked about China's growing external debt.

We know China has an inflation problem and we know they have been trying different measures to control it such as raising interest rates and reserve requirements.

MMT proponents realize this doesn't work because it simply raises incomes and prices (the former through the interest channel and the latter through higher bank cost of funds, which are passed along).

Now it appears they are trying to halt inflationary pressures by pushing their currency up. But how are they doing it?

Curiously, despite over $3 trillion in available foreign currency reserves, China appears to be borrowing (mostly dollars) and using these funds to buy their own currency. (That's Warren's speculation as well as mine.)

This is how countries typically get in trouble: by getting in debt in another currency.

China's $430 bln in foreign debt (as of 12/31/2009) effectively offsets some of their reserve position. How far will this go? Anybody's guess, but it could get out of control rather quickly if it persists.

By the way, even though the IMF and others harp about all the external debt of the U.S. the truth is, we don't have ANY external debt. All our debt is denominated in dollars and regardless who holds it, it all sits in accounts at the Fed.

1 comment:

googleheim said...

This is really interesting.

China has stuck everyone including themselves with a foreign denominated savings glut, which is generating itself into a problem to save them from the hole of inflation they have manufactured at home.

They are completely opposite the Argentina Menem fixture of 1 peso to 1 dollar which allowed the young Argentines to escape and to travel wildly in the 90's but only to be trapped in the next decade.

The Chinese who solely scratch a living and operate in the Yuan RMB and are trapped inside the country for sure.

However, if interest rates change to the Chinese by balancing of the US budget, then we could see 2001 Argentina happen in some screwball "other" way for the Chinese in 2011 ???