|
|
|
Subject:
The Chinese economy begins its fall
Nanheyangrouchuan
8/26/2008 11:12:13 AM
|
"http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/26/ccchina126.xml"
Beijing swells dollar reserves through stealth
Last Updated: 12:31am BST 26/08/2008
Have your say Read comments
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.
advertisement
Click here for more info!
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".
# More on currencies
# More on economics
# More Ambrose Evans-Pritchard
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.
Have your say
Print this page as text only
Email this story
Post this story to: del.icio.us | Digg | Newsvine | NowPublic | Reddit | Fark
Comments
American capitalists have no loyalty to the country, only to greed, which is idolatry. In time, Communist China will be able to buy America off on Taiwan, and it will fall like ripe fruit into the palm of their hand. The cheap goods from China is like a drug to the American consumer. We export our manufacturing jobs to China, along with our green house gases, and get cheap goods in return. Someday this will end.
Posted by The Professor on August 26, 2008 3:11 PM
Report this comment
You can be sure, if there is a way to greatly injure the US with the purchasing of dollars, China will do so. This is a communist country that will stop at nothing for power. The people there exist solely for the use of the government and they don't even realize it because information is so restricted. This is a very dangerous country and it's interesting how the leftist media in the US sugar coats it.
Posted by shizzle on August 26, 2008 3:00 PM
Report this comment
You guys are all so funny pretending there are still nation states out there. Like it's us versus them, right?
Posted by Joshua on August 26, 2008 2:42 PM
Report this comment
China's reserves of USD has been going up gradually for YEARS. This news story is fabricated, to make you believe that China is making the USD go up in value. This is intentional disinformation. The USD is going up in value due to intentional market manipulation by private central bankers (Western banks).
Posted by John on August 26, 2008 2:29 PM
Report this comment
Beijing has raised the reserve requirement for banks five times since March TO PROTECT THE BANKS FROM THE BANKRUIPT COMPANIES.
Very sound banking.
Posted by DG on August 26, 2008 2:24 PM
Report this comment
I don't know why they have played all these nut shell games for so long. The longer we (meaning I live in the US) wait to fix the problem the harder the fall will.
Their are other factors that make a crash inevitable. social security (not reported on the books), medicare/medicaid, and then their is there is ERISA act of 74. So many baby boomers have bet their retirement on the stock market. By 2016 they have to start taking payment by law. What happened when more people are selling than buying?
Posted by VegasRage on August 26, 2008 2:22 PM
Report this comment
It is a strange world we live in. I can smell wood burning as your commenteers try valiantly to understand it. It would be so much the better place if we did not have governments....you know the criminal gangs that run these fiefdoms we us as indentured servants.
But we the people invite them to rule us as royalty when first we entertain that socialism and the free lunch could ever ever in this physical universe work.
Posted by Fred X on August 26, 2008 2:22 PM
Report this comment
Living in China for a year now, my perspective is this:
Prices of houses in the cities are inflated due to speculation. In Shanghai, I read that the population has actually shrunk by a million plus over the past few years due to inflation and being unable to purchase affordable housing.
The chinese government basically fears destabilization because of job losses. You have to really wrap your head around the number of people that need jobs here in China. There are so many factories closing down here its quite scary actually. Example: 1/3 of factories manufaturing screws in Wuxi have closed down. That's just one area and its a fairly large and concentrated area involved in manufacturing just this product. Think of the other sectors of industry that are also affected. Massive numbers of jobless people.
The chinese people can never get any views that oppose the stability of the government. The news is simply controlled by the government. I wouldn't even call it news because its bordering on propaganda, cleverly edited to seem like news. I don't mean they take draconian measures to shoot people who provide opposing views on TV because there are none! People are trained what to say for an interview on TV. My sister was told what to say just before they interviewed her, if not they just won't air her interview.
The US isn't blameless for its own woes. Poor regulation in the housing loan industry is what sparked this off. You leave loopholes, people are bound to take advantage of it. Plain and simple, its human nature. I think the Chinese government was hoping to piggyback on America by subsidising the American lifestyle until it was self sufficent enough to decouple. Guess they weren't banking on American pulling the rug from under them unintentionally. Central planning only works with certainty in Lalaland.
Posted by Ray on August 26, 2008 2:19 PM
Report this comment
China has openly talked about hoarding Dollars and using it as its 'economic nuclear option' America may well pay a heavy price for running up six of its worst ever trade deficits since 2001.
Posted by Tony Makara on August 26, 2008 2:05 PM
Report this comment
Chinese online shops are selling small items for under two pounds worldwide airmail shipping included. Who do you think is subsidising the low postal rates enjoyed by these companies? Not just the Chinese post office- our domestic postal deliveries of items sent from foreign countries are done on a reciprocal agreement, only there is no large postal traffic in the other direction from which the Royal Mail can recoup their costs.
The difference between postal rates in different countries was the basis of the original Ponzi scheme, a supposed arbitrage operation buying cheap Italian international postal reply coupons and redeeming them in the USA for the equivalent US postage. It was a fraud, with no coupons actually traded, but the public was bilked of large "investments" in the scheme. The current Chinese manipulation of the international postal agreements to aid their own businesses would seem to involve an actual extraction of value from the rest of the worlds postal system.
Posted by John Bull on August 26, 2008 1:48 PM
Report this comment
The Chinese people accept lower wages because they have a GUN to their heads. Aren't you glad you live in a FREE society? (US, UK, France, Deutschland, etc.)
Posted by Michael on August 26, 2008 1:44 PM
Report this comment
Thank you A.E.P: We can always
count on you for the financial facts !!!
Posted by Jay on August 26, 2008 1:41 PM
Report this comment
Jeroen: The answer to your query is that China is
not a democracy. The government controls
everything in China, so free thinkers have no
voice. There is massive unemployment in China,
and the government is concerned that if there is
a slowdown in the economy (which is
happening), then the political stability of the
regime is threatened. They like power and don't
want to lose it. So, the most of the Chinese
people are willing to work under intolerable
conditions in this environment.
Posted by Pete on August 26, 2008 1:39 PM
Report this comment
Accumulating depreciating dollars and simultaneously propping up the US dollar does make sense.
What would not make sense is accumulating US Dollars and then selling them for another currency, thus causing the purchasing power of the dollar to decline.
What the Chinese and others are doing is collecting as many dollars as possible which they then swap, not for another currency, but for natural resources and the firms that produce them, as well as for part ownership of a great swathe of Western infrastructure.
The chinese are entering into long term (up to 20 year) contracts to ensure their supply of natural resources.
The money they use to buy up these natural resources is obtained from us, when we buy cheap consumer goods (which will be worn out and therefore need to be replaced after 2 to 4 years).
The chinese policy is eminently sensible. What is hair raisingly stupid is Western foreign, financial and economic policy.
The proportion of natural resources which can be owned be publicly traded companies and bought on the open market is declining each year. Increasingly natural resources are being "nationalized" by the states on whose territories they lie.
The West is in terrible danger of being forced to compete with countries literally drowning in money for a dwindling supply of "for sale" resources.
The thing that continually amazes me is that nobody in the West, with the exception of the Neo Cons, whose strategy of "chicken" seems increasingly likely to leads us into total disaster, is interested in this strategic cul de sac.
Why is that? But even if you can't be bothered to think about this problem, don't forget: everytime you buy something made in China, that money will be used to bid against you for ownership of something you want and need. This is called wealth transfer, and is possibly the greatest wealth transfer in the history of the world.
Posted by huw on August 26, 2008 1:36 PM
Report this comment
It is in China's interest to control our financial future, which they do. You can be that if China decided invade Taiwan, the USA's response would be the same as it was for Georgia. Nothing. Why? All China has to do is dump its' 2 Trillion Dolllars into the Market and exchange them for Euros. Are you ready for a $100.00 loaf of bread? lol Get ready. We will pay the piper one day. That day is coming.
Posted by m e brooks on August 26, 2008 1:30 PM
Report this comment
This is no surprise. There is an election in the US this November and the Chinese have to make a lot of illegal contributions to the Democrats. Not to mention Bill Clinton needs more money in order to expand his Presidential Library and you know Bill don't come cheap.
Posted by kmpk on August 26, 2008 1:25 PM
Report this comment
Can somebody please explain me why it is that the Chinese people accept beeing underpaid in order to produce products that are exported to the USA who have to borrow money from the Chinese in order to pay for them???
Are they perhaps;
Brain dead?
Lobotomised?
Masochists?
Plain stupid?
Posted by Jeroen on August 26, 2008 1:17 PM
Report this comment
Can somebody please explain me why it is that the Chinese people accept beeing underpaid in order to produce products that are exported to the USA who have to borrow money from the Chinese in order to pay for them???
Are they perhaps;
Brain dead?
Lobotomised?
Masochists?
Plain stupid?
Posted by Jeroen on August 26, 2008 1:16 PM
Report this comment
Short term fixes all over the world.As you have said Sir it is a race to the bottom for fiat currencies.
When the herd twig what will they buy?
I fear big interferance in the gold price as we have been seeing, physical demand as reported is large and the price keeps dropping.
But if the worlds Messrs Average all decide they trust it what then, confiscation?
Posted by Mark on August 26, 2008 12:57 PM
Report this comment
Not a wise move, in my opinion. China will be able to control the value of the dollar, but at the cost of the Fed controlling its whole economy. If I was them I'd had not done it.
Posted by Botannicus on August 26, 2008 12:55 PM
Report this comment
Interesting piece, Ambrose.
But as the Chinese stock up Greenback they acquire the possibility of pulling the rug from under the USD, too.
Posted by ottar bighand johansen on August 26, 2008 12:51 PM
Report this comment
RB: FX rate of "1,50 euros to the USD" should read euro USD 1,4584 (down from USD 1,60 earlier this year). The Pound sterling now USD 1,8357 and in descent against every major currency. Gentlemen we have a sterling crisis.....deja vu?
Posted by simon cardew on August 26, 2008 12:39 PM
Report this comment
The Chinese are taking big risks in buying the dollar now, but if it really stabilises at a higher rate (eg ?1 = $1.20) then it may just pay off. Otherwise China is now obviously subsidising the United States again by buying T-Bonds and thereby lowering interest rates. A higher dollar on the other hand is good for fighting inflation by making imports cheaper. Clearly China is helping the Fed fend off recession and stimulate the economy.
As to the health of the Chinese economy: it was obvious to all that their economy was overheating, esp when you look at inflation figures (same with Russia). But I would still expect China to outperform the West or other places when it comes to growth. Even a growth rate of 5% is pretty good and will assure that China will become at least the second largest economy in the world. More so if the yuan will appreciate agains the dollar (which it will). As a result the US$ GDP of China will look even bigger (again, same with Russia).
Posted by Ismail on August 26, 2008 9:38 AM
Report this comment
China has no option other than to accumulate US dollars to stabilise their own economy and indirectly help America as they lurch from side to side. Essentially there are too many US dollars held outside the USA. The euro cant take all the strain....anything over 1,50 euros to the US dollar is a prescription for a whopper for a European recession. Britain may think its immune but over 60% of British exports go to the euro zone. A weak Germany is bad for Britain....so dont get too excited.
Posted by richard bond on August 26, 2008 9:37 AM
Report this comment
David
Nope that's pretty solid. The reason its done is its (politically) better/easier to give someone a small pay rise in nominal terms, slash his wages in real terms, keep him in some form of employment and blame foreigners.
Or I suppose one could just say, politicians are idiots and mercantilism is easier to understand.
Posted by DominicJ on August 26, 2008 9:15 AM
Report this comment
Am I alone in wondering how accumulating large quantities of a weak currency in order to weaken your own currency actually achieves anything? Yes, it's obvious that it makes your exports 'competitive', but only because you're effectively giving them away. Or am I missing something?
Posted by David on August 26, 2008 8:47 AM
Report this comment
We will deeply lament to have closed local industries. Asia will have no other choice than to increase prices of manufactured goods, and we, we have no purchase alternative. To think that western corporate retilers will drop its margins is dreaming in Shangri La.
Another nice effect of terminal corporate capitalism
Kind Regards
Joseph
Barcelona
Posted by Joseph on August 26, 2008 8:31 AM
Report this comment
It was obvious the West could not go on buying limitless amounts of manufactured goods from China (or wherever in the Far East) when it makes and sells little to the same markets.
The US, in this analysis, is even more exposed than Europe - when you analyse the parallel flow of oil revenues - which do not cycle back from producer states anything like as much into the continental US.
China is at last feeling the effect of its export markets being unable to afford to go on buying in such volumes when they have no return revenue streams from the same relationships.
The Global Economy concept simply does not work when it is fuelled by the currency printed in one country to pay for an increasing number of the staples of life produced in another.
Posted by simon coulter on August 26, 2008 7:27 AM
Report this comment
So the current weakness in precious metal prices, and even more so PM equities is a great buying opportunity. There is far worse to come and the August PM fall was artificial - all currency interventions tend to end badly remember. So what to buy, see:
link
Posted by Peter on August 26, 2008 7:16 AM
Report this comment
Wow. So it took the HSBC's currency team in Asia couple of months to figure out what the hell is Central bank doing?! Nice.
Anyone out there still thinking that value of US dollar is managed by FED. Well, think again.
Posted by Laco on August 26, 2008 7:09 AM
Report this comment
It just shows you what a real mess the world economy is in. The Central banks are flip-flopping from one idea (or emergency) to the next in a desperate bid to hold their economies together. This is a race to the bottom for the fiat currencies.
The idea that the US Fed is going to raise rates is a joke. Look at the latest housing stats, Libor, M3, credit and car loan defaults etc. The bond market is telling us that deflation is the real risk. Expect cuts in interest rates to try and prevent this and massive inflation in 2 years.
Posted by D Rumsfeld on August 26, 2008 6:40 AM
Report this comment
Prices are now falling in cities that make up over half China's population.
Two-thirds of China's population still lives in the countryside, so I don't see how this is possible.
Posted by Matthew on August 26, 2008 6:27 AM
Report this comment
This should hardly come as a surprise. I dont think that there is a history of ANY of the extremely export-lead currency manipulating economies ever turning away from actively working the currency markets. Basically the export industry sectors get so large that it is politically impossible to really go back to a truly market-driven approach to your national currency.
Posted by Steve on August 26, 2008 6:21 AM
Report this comment
The Chinese yuan is pegged to a basket of currencies, therefore the export prices to the basket countries remains the same. Exports to the US become cheaper.
China should be forced by the WTO to float it's currency on on the forex market. This would have the effect of all WTO members to be on the same level playing field.
Posted by Geoff Roach on August 26, 2008 3:31 AM
Report this comment
Ambrose, thanks for that excellent metaphor 'swivelling on its axis'. It explains the process precisely. I think we can expect more of this clever covert manipulation as China flexes its financial muscles in an attempt to counteract the US's efforts to devalue its way out of its politico-economic problems and dump them on others like the Chinese and Germans. There's more to currency wars than just interest rates and some Chinese industry is in a serious economic mess. B of E take note, please while we are not in the Euro!
Posted by Colin on August 26, 2008 12:05 AM |
| |
|
|
|
|
|
Latest
News |
Most
Read |
Hot
Topics |
|
|
|
