Brad Setser

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Where is China keeping its reserves …

by Brad Setser
November 29, 2004

It is not too hard to figure out what Japan is doing with its reserves.

From the beginning of 2003 to September 2004, Japan’s official reserves increased by $360 billion. Over that time frame, Japan’s holdings of treasuries increased by $342 billion. That number also includes private Japanese purchases of treasuries, but it still tracks the reserve data pretty closely. There is a bit of a lag between the purchase of dollar reserves and the purchase of treasury bills with those dollars, but the two go up together. There is a reason why treasury dealers say Japanese intervention leads to higher demand for short-term treasury bills.

China poses a bit more of a mystery. From beginning of 2003 til September 2004, the People’s Bank of China’s (PBoC) reserves increased by about $268 billion (including the roughly $45 billion used to recapitalize state banks). China’s recorded holdings of treasuries increased by $56 billion over this time, so only 20% of so of China’s increased reserves are showing up in higher recorded Chinese holdings of treasuries. This year reserves are up $106 billion while holdings of treasuries are up only $16.5 billion, so the fraction of Chinese reserves going into Treasuries seems to be declining over time.

So what is China doing with the remaining $210 billion of reserves assets that it has added over the past two years? Some of it may be going into “disguised” buying of Treasuries – through various asset management firms or foreign broker dealers. Holdings of treasuries by Caribbean banking centers are up are up $50 billion this year; UK holdings are up by a comparable amount. Some of the demand from the Caribbean represents demand from US hedge funds based there. But some may be coming from central banks working through foreign broker dealers or even investing in hedge funds (remember, the Bank of Italy invested in LTCM).

Some of China’s growing reserves are no doubt going into other US assets – agencies, asset backed securities, even corporate bonds — to try to get higher yield. Reported official buying is of these assets is small, but central bank may be buying through intermediaries.

Is much going into Euro denominated assets? To date, probably not – people in the market would know if the PBoC was moving into Euro. Moreover, China is large enough that its numbers impact on the global statistics: in 2003, the world added roughly $60 billion in euro and yen reserves, and $440 billion in dollar reserves. Since China accounted for about a quarter of the overall increase in the world’s reserve, it seems likely that its reserve acquisition did not deviate too much from the global breakdown of roughly 90% dollars/ 10% other currencies.

Let’s look at the data in slightly different way, by looking at China’s total stock of reserves rather than what China is doing with the reserves it has bought over the past two years. The Economist this week estimated that 80% of China’s $515 billion in reserves are in dollars, which works out to $412 billion. China’s recorded holdings of Treasuries are around $175 billion. That leaves around $240 billion in other dollar assets – not chump change.

China’s reserve management is fundamentally constrained by its peg to the dollar. Suppose China started moving its reserves from dollar debt to euro debt – that would have the same impact as if China took some of the dollars now coming into the PBOC (after all, reserves going up by over $10 billion a month) and used them to buy euros. It would put pressure on the euro/dollar. If China kept the yuan pegged to the dollar, then yuan would depreciate along with the dollar and the PBOC would need to start to buy more dollars to support the peg … China would end up needing to continue to buy large amounts of dollars to support the peg.

All this is fancy way of saying that if China were to start pegging to the euro, it could buy euro assets to keep the yuan/ euro rate fixed. But so long as it is pegged to the dollar and there is pressure to appreciate v. the dollar, supporting the peg requires China to buy lots of dollar assets.

There is a scenario where China might be able to hold fewer dollar assets and still keep the peg to the dollar… namely, if the European Central Bank (ECB) bought China’s dollar reserves. Suppose the PBoC starting selling dollars/ buying euros, but the ECB then stepped in, buying dollars/selling euros to avoid euro appreciation. This would let China buy dollars to support its peg and then sell its dollars to the ECB for euros — avoiding any pressure on the euro/dollar. But it is not likely that the ECB is any more interested in the PBoC in buying $150 billion plus of dollar debt a year.

China indeed faces a real dilemma. Not only does it have a large stock of dollar reserves, but that stock is growing. Yet the value of that stock is also likely to fall in the future. China’s over $500 billion in reserves are currently equal to about 1/3 of China’s GDP, so a 33% real appreciation of the yuan would generate capital losses equal to 10% of China’s GDP. That is a big loss, by any measure. Defending the peg right now requires reserve accumulation of $150 billion a year (in the third quarter, China’s reserves increased by almost $45 billion). If that continues, in four years, China’s reserves would easily exceed $1.1 trillion. China’s GDP is rising too – if the exchange rate stays constant and the IMF’s growth path is right, GDP will be @ $2.35 trillion in 2008. Reserves would then be equal to about 47% of China’s GDP.

A 33% real appreciation and reserves to GDP of 45% produces a capital loss of 15% of GDP. But that probably underestimates China’s future losses, since over time, the scale of the real appreciation China needs also is rising. China’s economy is becoming more productive very quickly — and remember that Japan’s economic miracle in the 50s, 60s and 70s was accompanied by substantial real appreciation in yen. A 50% real appreciation produces a capital loss of above 20% of GDP. That is real money, even for fast growing China.

This is why what Larry Summers has called the balance of financial terror is fundamentally unstable. The “terror” aspect comes from the fact that is China were to start to sell (or just stop buying), the value of its existing holdings would fall rapidly and US interest rates would go up sharply. The balance refers to the fact that to date, China has opted to hold its Treasuries and other dollar assets, not to sell. But for the balance to stay stable, China literally needs to double its bet – and double the central bank’s expected loss — over the next four years.


  • Posted by fatbear

    OK – they take the gamble – potential loses escalate – they know that sooner or later, the cows will come home.

    The Chinese are long-term realists, much more so than most Americans (and not only the Bushies) – if they have to take bad medicine, wouldn’t they rather a small abs number equaling 10% now (when political control is still ironclad) than a larger abs number equaling 15% later (when political control may be weaker)?

  • Posted by General Glut


    China can avoid all capital losses by simply investing its “excess” reserves in real US assets, no? They seem to be quite interested in Canadian oil and gas deposits as well as Brazilian soy fields. Why not buy up US natural gas deposits, factory farms and downtown real estate as well?


  • Posted by anne


    This is scary stuff, for us, for China, for Japan. The post, as your others, is superb. But, I am asking myself worriedly, where does the unwinding of these positions come in? What a superb Blog.


  • Posted by glory

    GG, brad said as much here 😀

    “I suspect the Chinese increasingly will start using their financial leverage to make investments in oil/ gas/ natural resources. Sort of like the US oil companies after 1945. The Chinese have tons of savings, and tons of demand for resources. Rather than lend those savings (indirectly, since inflows from China are financing US FDI outflows) to exxon and the western majors who then prospect for oil/ gas/ etc to sell to you, why not create majors of your own?”


  • Posted by anne

    “China can avoid all capital losses by simply investing its “excess” reserves in real US assets, no? They seem to be quite interested in Canadian oil and gas deposits as well as Brazilian soy fields. Why not buy up US natural gas deposits, factory farms and downtown real estate as well?”

    Thank you; of course. China and Japan can invest here.

  • Posted by anne

    When we assume that India or China or Japan will suffer huge losses in foreign cash or short term reserves or Treasury bonds from a loss in dollar value, we are putting out of mind the fact that dollars can be used for American purchases.

  • Posted by glory

    hmmmm… from the “director of the Department of International Economic[sic] under China Foreign Affairs University” (buried at the verrrry end):

    “…To ward off foreign exchange risks, China needs to readjust the current structure, increasing the proportion of the euro in its foreign exchange reserves.

    “Considering the improving Sino-Japanese trade relations, more Japanese yen may also become an option. During the January-June period this year, the proportion of China’s trade volume with the United States, Japan and Europe to its total trade volume was 36.5 per cent, 28.6 per cent and 37.4 per cent respectively. Obviously, seen from the perspective of foreign trade relations, the US dollar makes up too large a proportion of China’s foreign exchange reserves.

    “China could also encourage its enterprises to ‘go global’ to weaken its dependence on US treasury bonds.

    “And *using US assets to increase the strategic resource reserves, such as oil reserves, could be another alternative.*” [/em added]

    and this coming from china daily, the unofficial mouthpiece of party apparatchiks 😀


  • Posted by Giles

    The only get out that I can see would be for China would be to inflate the trouble away. If it stokes up inflation in the US, so it is greater than it is in China, it can engineer a real exchange rate appreciation of the Yuan without taking nominal losses on it dollar holdings. This is of course provided that the reserves are no long held as bonds – in other words China should buy up assets with its stash of dollars. Of course ideally those assets should not be dollar denominated but their purchase should increase the rate of inflation in the US. Buying Oil would be one option – it’s a real fungible assets and its appreciation will increases inflation in the US? The only question is then whether its more inflationary for the US than China its self – which is possible given Chinas lower car utilitsation. Food for thought.

  • Posted by anne

    August 8, 2004

    China in Africa: All Trade, With No Political Baggage

    BEIJING, China – A look of satisfaction played on the trade official’s face as he reeled off statistics recently from a ministry report about China’s booming commerce with Africa.

    ”Forty African countries have trade agreements with China now,” said the official, Li Xiaobing, deputy director of the West Asian and African Affairs division of the Trade Ministry. ”We are doing a railway project in Nigeria, a Sheraton hotel in Algeria and a mobile telephone network in Tunisia. We are all over Africa now.”

    For any doubters, a glance at the statistics indicates that the official’s exultation is, if anything, understated. Though starting from a modest base, China’s trade with the African continent reached $18.5 billion in 2003, an increase of 50 percent since 2000, and it is on track for another big increase this year.

    China’s push into Africa is all the more remarkable because it comes when that continent has become the virtual stepchild of the international trade system, a mere footnote — or worse, simply unmentioned in discussions of global commerce.

    Beijing’s fast-rising involvement with Africa grows out of China’s immense and growing need for natural resources, in particular for imported oil, of which 25 percent now comes from Africa.

    Lacking the economic and political ties that Western Europe has with Africa as a legacy of colonialism, and the economic power that the United States wields because of its wealth and influence in international financial institutions, China’s new leadership under President Hu Jintao has pushed to forge stronger ties. Mr. Hu himself traveled to Africa in January and February, visiting Egypt, Gabon and Algeria.

    China’s diplomatic machine has spared no effort, making sure that African leaders do not view its interest as a passing fancy. The prime minister and vice president have also visited Africa in the last year.

  • Posted by anne

    China Widens Economic Role in Latin America

    SANTIAGO, Chile – The expected arrival here on Friday of President Bush, who personifies for Latin Americans the economic and political power of Washington, is being greeted with an uneasy mix of protests and hopes for greater growth.

    But while the United States may still regard the region as its backyard, its dominance is no longer unquestioned. Suddenly, the presence of China can be felt everywhere, from the backwaters of the Amazon to mining camps in the Andes.

    Driven by one the largest and most sustained economic expansions in history, and facing bottlenecks and shortages in Asia, China is increasingly turning to South America as a supplier. It is busy buying huge quantities of iron ore, bauxite, soybeans, timber, zinc and manganese in Brazil. It is vying for tin in Bolivia, oil in Venezuela and copper here in Chile, where last month it displaced the United States as the leading market for Chilean exports.

    While President Bush is spending the weekend here for the Asian-Pacific Economic Cooperation forum, President Hu Jintao of China is here in the midst of a two-week visit to Argentina, Brazil, Chile and Cuba. In the course of it, he has announced more than $30 billion in new investments and signed long-term contracts that will guarantee China supplies of the vital materials it needs for its factories.

    The United States, preoccupied with the worsening situation in Iraq, seems to have attached little importance to China’s rising profile in the region. If anything, increased trade between Latin America and China has been welcomed as a means to reduce pressure on the United States to underwrite economic reforms, with geopolitical considerations pushed to the background.

    “On the diplomatic side, the Chinese are quietly but persistently and effectively operating just under the U.S. radar screen,” said Richard Feinberg, who was the chief Latin America adviser at the National Security Council during the Clinton administration. “South America is obviously drifting, and diplomatic flirtations with China would tend to underscore the potential for divergences with Washington.”

    Chinese investment and purchases are seen as vital for economies short on capital and struggling to emerge from a long slump. In Argentina earlier this week, for example, Mr. Hu announced nearly $20 billion in new investment in railways, oil and gas exploration, construction and communications satellites, a huge boost for a country whose economic vitality has been sapped since a financial collapse in December 2001.

    China is also increasingly willing to venture outside the economic realm. In March, for example, after Dominica, in the Caribbean, severed diplomatic relations with Taiwan, Beijing responded with a $112 million aid package, which includes $6 million in budget support this year and $1 million annually for six years. In Antigua, it has pledged $23 million toward the construction of a new soccer stadium.

    Political relations seem to be advancing most rapidly with Brazil, Latin America’s most populous nation, where the left-leaning government has repeatedly floated the idea of a “strategic alliance” with Beijing.

  • Posted by glory

    hmmmm… so the sleeping dragon has awakened and is looking toward the dark continent… smoove 😀 makes a lot of strategic sense from their POV, esp if they want to rival india in the region. and africa’s been ignored for so long, i’m sure they’re flattered from all the attention. also interesting in light of brazil’s push onto the world stage. almost makes all that BRIC talk sound plausible 😀

    and for more background see: “The Economic Outlook for Africa in the 21st Century” –


  • Posted by glory

    oh and don’t forget their just completed FTA w/ ASEAN, including “a pact to flesh out their agreement last year to create an Asean Community along the lines of a unified Europe by 2020. It aims to create a unified market with common security goals.”


  • Posted by brad

    glut — investing in real assets in the us does not quite work, to my understanding. Take real estate: you might get a higher dollar return, but you still would lose on the dollar’s eventual depreciation. And oil fields and real estate are not exactly classic reserve assets. So long as the PBoC — not private or state owned firms — is the one accumulating foreign assets, China’s options are limited if they want to stay liquid.

    To get a true hedge, I think China would need to buy the asset of a US firm that exports to China (i.e. has yuan revenues). The value of the firm would go up as the dollar went down v. the yuan, since every yuan in sales generates more $ income. So Boeing, or GE’s aircraft engines division (if it ever was spun off from the rest of GE)…

  • Posted by fatbear

    US real estate is not a panacea – remember what happened to the Japanese purchases of (to name 2) Pebble Beach and Rockefeller Center – neither turned out too well, and there were many more than those 2.

    Buying companies that sell to you (Boeing, GE engines, et al.) works better, especially if you do a tech transfer along the way. There’s also the IP businesses (a la Japanese purchases in late 80’s – but this time smarter – more like medical tech) – also good for tech transfers.

    But none of these will use more than a small fraction of the total available. I tend to like the “invest in LDC-land” idea better – it secures for China lots of resources and helps them build a base against the EU/US hegemony.

    But it still makes more sense to take the loss (as one is guaranteed) while you still control your political base – the more domestic middle class there is, the harder it will be to stay in control after decimating their economic base.

  • Posted by glory

    well, one of the beefs the US has w/ china is their lax enforcement of IP rights, so why not just *buy* it?

    what you’d lose in economic value, perhaps you’d gain in political capital?

    also an interesting article on the DJN today about china overhauling its bond market, setting the stage for a 2005 reval?,,SB110167487373984976,00.html

    “Authorities in China continue to make strides in reforming how the country’s debt markets operate, and they are proposing a number of changes next year that could move the financial system closer to one that allocates credit based on levels of risk…

    “Changes in the treasury-bond market, which is set this year to absorb a record 702.2 billion yuan ($84.84 billion) in Ministry of Finance treasurys, are incubating China’s immature financial system. Reform in the bond market reflects efforts by Beijing to reverse decades of state planning and make the financial system allocate credit according to risk levels. Each step gives market forces more influence over the government’s cost of issuing debt, and will eventually affect borrowers throughout the economy.

    “Ultimately, interest-rate reform should set the conditions that authorities deem necessary for releasing capital controls and setting the yuan free.

    “There is growing evidence that signals from China’s treasury bond market are working as planned.

    “For instance, China in October raised lending rates for the first time in more than nine years, taking many people by surprise — but not those in the bond market, where treasurys had as early as April priced in interest-rate increases. The sector hardly reacted to the rate boost.

    “While homeowners’ mortgage charges are only now reflecting the increase of 0.27 percentage point in the one-year lending rate last month to 5.58%, China’s bond market is telling them to anticipate much higher rates. The seven-year yield has added more than 1.5 percentage points this year to just over 4.9%.

    “But China’s $440 billion bond market remains small. The Asian Development Bank put it at 31% of last year’s gross domestic product, less than the regional average of 46% of GDP and well under the 160% of GDP in the U.S.”

    oh and as for oil fields and real estate not being “classic reserve assets” i think benjamin graham and jm keynes would beg to differ! it was keyenes afterall who propsed BG’s “commodity buffer stocks” – – at bretton woods for a commodity reserve stablisation fund (which was rejected in favor of the white(?) plan iirc)… and, indeed, i believe the oil futures contracts market is quite liquid 😀

  • Posted by hbj

    Is it possible or plausible that the US would attempt to quietly and gradually monetize debt by using Carribean/offshore banking centres?

  • Posted by anne

    Celebrating Two Centuries of Current Account Deficits. The further deterioration in Australia’s current account deficit in Q3 to test previous cyclical highs as a share of GDP has seen the usual doom-mongering, with predictions of a currency ‘crisis’ (the Australian dollar is in fact at historical highs on a trade-weighted basis) and claims foreigners will stop funding our supposedly excessive consumption. The fact that foreigners have been funding Australia’s economic growth in this way more or less continuously for 200 years perhaps makes predictions of this kind the single worst cumulative forecasting failure of any economic point of view, yet people never seem to tire of these predictions.

    Unlike in the US, the Australia government currently makes a positive contribution to national saving, so the current account deficit is entirely the work of consenting adults. Unless one can make a persuasive case for systemic failure in capital markets, then Australia’s current account deficit is an unambiguous sign of economic strength, not weakness. The sad thing is that much of the doom-mongering comes from economists who should know better.

  • Posted by anne
  • Posted by brad

    one theoretical point: a country (australia) can run a current account deficit indefinately. a small current account deficit can be consistent with a stable debt to GDP ratio. a country (USA) cannot run a trade deficit (technically, a deficit in trade and transfers) indefinately. that leads to an ever increasing debt to GDP ratio.

    as for China investing in real assets in LDCs — no doubt that is what they increasingly seem to be doing. But that doesn’t fund the US current account deficit, so it might not be consistent with the current dollar/ renminbi parity. Chinese investment in say Argnetine or africa could fund (directly) an Argentine or African current account deficit, but not the US one. I suspect this is a way China is trying to deal with their current problem — which is more reserves than they want. Rather than have the PBOC buy US assets, they want Chinese firms to buy a broader range of overseas assets — capital inflows to china would fund something other than a reserve buildup. But as China shifts from funding the uS to funding the rest of the world, the US would still need to adjust …

  • Posted by Tian Zhou

    Hello,i don’t think China can start buying Euro or the the Treasury bills of EU countries.
    First, given the unprecedented level of the reserves in dollars, it will definitely incur a capital loss that exceeds the capital gain in buying Euro.
    More important, will EU counries wiing to sell such bills to China? I don’t think so, for they want the euro depreciate…..
    in addition, when we talk about buying assets of strategic importance, we should also consider whether it is feesible,i.e, will anyone sell it to China without another conditions? Will USA sell oil resources to China without additional terms?
    i welcome your argument here, because i am a Chinese student, majoring Finance and statistics.

  • Posted by Jeff Fisher

    On a net basis foreigners can not sell the dollar. They are trapped.
    Americans have no foreign currency to exchange for the trillions of dollars in the world’s cash balance.
    US hyperinflationary depression is a likely endgame. The hyperinflation will be a result of collapsing dollar demand. Real prices however, will fall. Please see von Mises’ discussion of German Hyperinflation in 1923. The coming decade will make the 1970s look sound.

  • Posted by Nancy A Kirsch

    Why continue to promote this exporter/importer relationship if it is so potentially unstable?

    Shouldn’t the trade relationship be more one of long term dice gambling, where in the long run no one wins or loses?

  • Posted by Giles

    Perhaps a more interesting question than how its is possible for Australia to run a deficit for 200 years would “has any country run a surplus of say 5% for any sustained period of time and not suffered.

  • Posted by General Glut


    A plug from DeLong sure does wonders for one’s traffic!

    I agree that real assets are not “classic reserve assets,” but I had in mind the PBC reducing its reserves by transferring them to state industries or (semi)private Chinese interests. Then these other actors could purchase real assets, whether in the US or in dollarized LDCs. CAFOs in Texas? Oil in Ecuador? Textiles in Guatemala to get in on CAFTA?

    It could all be yours if the price is right.

  • Posted by IJ

    The power of money! Comments from Anne’s posts suggest that China is successfully using its new and growing wealth to buy its way into Africa and South America. The countries in these continents are delighted to be patronised.

    “Beijing’s fast-rising involvement with Africa grows out of China’s immense and growing need for natural resources, in particular for imported oil, of which 25 percent now comes from Africa.”
    “Lacking the economic and political ties that Western Europe has with Africa as a legacy of colonialism, and the economic power that the United States wields because of its wealth and influence in international financial institutions, China’s new leadership under President Hu Jintao has pushed to forge stronger ties.”

    South America:
    “But while the United States may still regard the region as its backyard, its dominance is no longer unquestioned. Suddenly, the presence of China can be felt everywhere, from the backwaters of the Amazon to mining camps in the Andes.”

    “Driven by one the largest and most sustained economic expansions in history, and facing bottlenecks and shortages in Asia, China is increasingly turning to South America as a supplier. It is busy buying huge quantities of iron ore, bauxite, soybeans, timber, zinc and manganese in Brazil. It is vying for tin in Bolivia, oil in Venezuela and copper here in Chile, where last month it displaced the United States as the leading market for Chilean exports.”

    “China is also increasingly willing to venture outside the economic realm. In March, for example, after Dominica, in the Caribbean, severed diplomatic relations with Taiwan, Beijing responded with a $112 million aid package, which includes $6 million in budget support this year and $1 million annually for six years. In Antigua, it has pledged $23 million toward the construction of a new soccer stadium.”

    Moreover, the Economist reports:
    “Local analysts of African business are in a frenzy about the new wind from the East. At a recent oil and gas conference in Cape Town, speakers lined up to describe the rush. One produced a map of Africa, highlighting new Asian oil interests: it was a forest of Chinese flags. Asia now takes about 13% of African exports.”

    China is learning rapidly from a former president of the United States: “It’s the economy stupid.”

  • Posted by Ed

    They can afford a 15% loss, a 30% loss or any other number. Central bank could have negative equity in the trillions, (the equivalent of helicopter money), and this doesnt need to have any macro effects whatsoever if, as in China, the volume of reserves is clearly well above what is needed.Central banks balances are an acounting device, to show that money in circulation is backed by “something”. Take away that “something”, or cut its value, and, yes, a loss appears in the balance of the central bank. So what?

  • Posted by anne

    Keep in mind that as China understands “it’s the economy” in Africa or Latin America, in Asia China is economically active everywhere.

  • Posted by anne

    July 9, 2004

    Mongolia’s Shifting Ties: More China, Less Russia
    By JAMES BROOKE – New York Times

    ULAN BATOR, Mongolia – Two weeks ago, China’s largest copper company signed a letter of intent to study investing in Mongolia’s largest mining project. This week, Mongolia’s president, on a state visit to Beijing, invited China to drill for oil. Next month, zinc production is to start at a new $50 million Chinese mine in eastern Mongolia.

    To link it all together, Chinese aid is paying for Chinese crews this summer to pave major roads across Mongolia’s grassy steppes. More may come from a $300 million loan offered by China’s president when he stopped here last year.

    Only 15 years ago, Mongolia, then a Soviet satellite, kept its land borders with China largely closed. Today, in a turnaround that reflects the rapid reorientation of the 13 other countries that have land borders with China, Mongolia now values China as its largest foreign investor and largest trading partner.

    “We are opening permanent border posts here, here and here,” Wong Fu Kang, chargé d’affaires at the Chinese Embassy here, said Tuesday tapping his forefinger on crossing points along his country’s long border with Mongolia.

    At Mongolia’s western end, he traced the path of a proposed road to connect Western China with the Russian city of Novosibirsk. In central Mongolia, there is a railroad project that will link copper and coal mines. In Eastern Mongolia, China has proposed building a bridge. To J. Peter Morrow, chief executive of the private Agricultural Bank of Mongolia here and Mongolia’s most prominent American businessman, the Chinese “are pushing on all fronts: a road here, a bridge here, a coal mine here.”

  • Posted by anne

    November 18, 2004

    Chinese Move to Eclipse U.S. Appeal in South Asia
    By JANE PERLEZ – New York Times

    CHIANG RAI, Thailand – In pagoda-style buildings donated by the Chinese government to the university here, Long Seaxiong, 19, stays up nights to master the intricacies of Mandarin.

    The sacrifice is worth it, he says, and the choice of studying Chinese was an easy one over perfecting his faltering English. China, not America, is the future, he insists, speaking for many of his generation in Asia.

    “For a few years ahead, it will still be the United States as No. 1, but soon it will be China,” Mr. Long, the son of a Thai businessman, confidently predicted as he showed off the stone, tiles and willow trees imported from China to decorate the courtyard at the Sirindhorn Chinese Language and Culture Center, which opened a year ago.

    The center is part of China’s expanding presence across Southeast Asia and the Pacific, where Beijing is making a big push to market itself and its language, similar to the way the United States promoted its culture and values during the cold war. It is not a hard sell, particularly to young Asians eager to cement cultural bonds as China deepens its economic and political interests in the region.

    Put off from visiting the United States by the difficulty of gaining visas after 9/11, more and more Southeast Asians are traveling to China as students and tourists. Likewise, Chinese tourists, less fearful than Americans of the threat of being targets of terrorism, are becoming the dominant tourist group in the region, outnumbering Americans in places like Thailand and fast catching up to the ubiquitous Japanese.

    As the new Chinese tourists from the rapidly expanding middle class travel, they carry with them an image of a vastly different and more inviting China than even just a few years ago, richer, more confident and more influential. “Among some countries, China fever seems to be replacing China fear,” said Wang Gungwu, the director of the East Asian Institute at National University in Singapore.

    Over all, China’s stepped up endeavors in cultural suasion remain modest compared with those of the United States, and American popular culture, from Hollywood movies to MTV, is still vastly more exportable and accessible, all agree. The United States also holds the balance of raw military power in the region.

    But the trend is clear, educators and diplomats here say: the Americans are losing influence.

    As China ramps up its cultural and language presence, Washington is ratcheting down, ceding territory that was virtually all its own when China was trapped in its hard Communist shell.

    “The Chinese are actively expanding their public diplomacy while we are cutting back or just holding our own,” said Paul Blackburn, a former public affairs officer of the United States Information Service who served at four American embassies in Asia in the 1980’s and 90’s.

  • Posted by brad

    Glut — very right about traffic. delong’s plug is worth a lot more than greenspan echoing our concerns (i.e. world won’t fund us forever) or even a sinking treasury market. nice posts today, btw.

    Suppose China starts investing in Latam resource producers (do not need to be dollarized). china in effect is taking dollars earned selling to uS and investing them in Latam. Latam can either use the dollars to build up its reserves (//ing china) or to buy US products. It eventually balances out. China ends up with a claim on a latam economy rather than a treasury, the latam country ends up with either a claim on the US or a US made good …

  • Posted by brad

    tian, thanks for commenting.

    re: your point on the euro, i suspect that China is less worried about the impact of selling dollars for euros (or treasury bills for german bunds) on the price of its existing stock of treasuries and more concerned that selling dollars for euros would end its dollar peg (giving in to speculators) — and it sees the dollar peg specifically and fx stability generally as the key to its growth/ recent economic success. Change is hard. it will be hard for the US to get used to borrowing less, but it will be hard for china (and all the actors inside china gaining from the current pattern of trade) to adjust to a US than consumes less and saves more as well …

    as for the point about oil, it is a “geopolitics” v “liberal economics” argument. a liberal economist would say that oil is a market, and it does not matter if say a US firm has contracted with a saudi oil firm to buy its oil. it will sell that oil to the highest bidder on the market, be it an American consumer filling up its SUV or a Chinese bus driver. Others say that it does matter — that in the event of a supply shortage, it is better to have oil in the hands of firms controlled by your own nationals. I suspect both points of view have some validity … certainly China seems interested in having chinese firms assume a bigger role in global oil production outside of China.

  • Posted by fatbear

    Tian –

    With regard to your question about whether China will be allowed to buy hard assets in the US:

    In the late ’80’s and early ’90’s Japanese investors were buying a great many hard assets in the US, including a large number of “trophy” real estate properties in New York, California and Hawaii. There was (unfortunately) ethnic and racial criticism of the Japanese for doing this, while there was no equal criticism of the Europeans or the Arabs for doing the same.

    When the turnover of Hong Kong was approaching, there was a significant number of ethnic Chinese buying real estate in California (especially in the 818 area code – the magic of 8) and New York (the 718 area code), as well as in Vancouver, Canada. Since this was money running away from mainland China (many Americans still had a soft spot in their heart for refuges from the mainland), there was not so much criticism.

    In the current economic climate, if China (or wealthy Chinese) were to buy “trophy” properties, there would be some nationalistic criticism. However, if the same transactions were to occur with “non-trophy” properties, it would probably be “under the radar” and not subject to such criticism.

    Also, there is no legal residency requirement for the purchase of real estate. In fact, except for communications licenses and other national interest assets, there is no requirement for purchase other than cash and acceptable credit.

  • Posted by Auntiegrav

    “The land and the people will go on.”

    The China that most of you are imagining in the financial markets is a small piece of overdeveloping land with robber barons and corporate weenies producing (proportionally to the total population) nothing. Junk. Nada. Stuff to sell to the U.S. like inflatable snowmen and santa figures. The sustenance (food, shelter, clothing) of China’s majority is available within China’s borders without the oil or money of the U.S. They just happened to realize that the quickest way to destroy the U.S. is to play the game out. We are suckers for the quick sale, the easy mark, and the cheap factory. China has but to shut off relations now and watch the U.S. collapse under its own debt, racked up buying cars to drive to work to buy more cars. We will be like Russia, selling our scientists, technology, and even the goddamn highways to Area 51 if need be, in order to buy oil to run our factory farms and flouride-spewing fertilizer plants. They have already won the next war, and we didn’t even know it started.

  • Posted by fatbear

    Auntiegray –

    Is that you, Elaine?

    I agree with you that China looks to the far horizon; a century is a short time in Chinese history. I also agree with you that they are capable of playing us expertly, and they may already have won the next war.

    However, China produces far more than inflatable Santas – go to any store and check out the goodies for Made in China tags. And China does not have the domestic oil resources necessary for the future – even now: they have gone from fully domestic-sourced to 3rd largest importer in under 5 years.

    China cannot cut itself off from the outside world now without great internal upheaval – it would be like the classic Wittfogel irrigation failures. The question is how they get what they want without inconveniencing themselves more than necessary.

  • Posted by anne

    Friends from China have been selectively buying American assets for a decade with no difficulty.

  • Posted by glory

    conspiracy theories notwithstanding 😀 i think it’s interesting the turnabout and indeed flurry in FTA’s this year – with TWO SAFTAs being negotiated (south asia and south america), the CAFTA and now “Japan and South Korea [have] agreed to launch free-trade talks with Asean, hours after the association clinched a momentous open-market deal with booming China.”

    it seems like the success of NAFTA (and i guess the EU?) are spurring the rest of the world on. i think the truly momentus deal will be if/when china and india ever sign an FTA, given their burgeoning bilateral trade. see “Passage to China”
    by Amartya Sen –


  • Posted by Silent E

    This is not about USD. It’s about China, the Middle Kingdom at the center of the Earth.

    If the yuan rises, then Chinese exporters will compete less favorably with other SE Asian exporters, exports to the US will suffer, and FDI flows slip as investments become more expensive. That means LOTS of unemployed Chinese, and that scares the Chinese leadership.

    That’s why China got started in propping up the dollar in the first place – not because it likes a strong dollar but because it needs a weak yuan (especially wrt its most important trading partner).

    Holding down the yuan is not about making a good return on the BoC’s capital, it’s social policy. Accumulating a trade surplus to hold down the dollar is one option for growth; but the alternative is to let the yuan appreciate, which would make imports cheaper, allowing average Chinese to buy more imported goods and accumulate more wealth and savings. While the second route might be better for China as a whole because it would lead to greater domestic demand and an accelerated growth of the middle class, it is not necessarily better for a Chinese leadership worried about civil unrest. Suppressing the yuan is a tax on chinese business and workers because it keeps the poor in order to create jobs; but as domestic policy, it msut be far more efficient than anything the corrupt and fragmented Chinese bureacracy and tax system could implement and pay for.

    BoC will be the last Asian Central Bank to re-value, because it can hold out longer than its neighbors. That gives it a commanding position and it forces others to stay in line with Bretton Woods two, or lose more jobs and investment to the beast of the east.

  • Posted by brad

    Silent E — well said, and well argued.

    but even the middle kingdom faces constraints on its ability to holdout.

    1) the longer it holds out, and the longer it holds on to its dollar peg, the more the renminbi depreciates … great for china’s exporters, but not so great for paying for all the commodity imports china needs — whose price (in dollar terms at least, less so in terms of euros) is rising.

    2) the more undervalued the exchange rate, the stronger the incentive to bet on the renminbi, and the more hot money inflows (assuming that china’s capital controls are leaky — as they evidently have been for the past few years).

    3) the more inflows, the harder sterilization becomes, and the more rising reserves translates into money supply growth and eventually inflation. the peg also makes it harder to stop the credit boom and resulting asset price bubbles in parts of coastal china — higher renminbi rates just make it more attractive to move your funds into renminbi, if you can …

    the overall system only works if japan joints china to provide $150 billion plus a year in reserve financing to the us. even if China gets more inflows next year and its reserves increase by $200 billion rather than $150 billion, it still won’t provide the same total financing as china and japan combined provided this year. that will impact on rates — so you could say there is a game of who blinks first going on right now between the MOF (Japan) and PBoC (China). MoF would be better off if China moved; if your read on Chinese preferences is accurate, China would be better off if the MOF resumed big time intervention, and took on more of the (financial) burden of supporting the $.

  • Posted by General Glut

    This back and forth is fun, no?

    Brad, I like your comments in (3) immediately above. The Chinese have got to be worried about asset bubbles and inflation and thus sterilize, but ineffectively. The longer the peg is maintained, the longer the need to sterilize, the more money leaks out into asset bubbles and general inflation.

    I’m not so convinced by your arguments in (1) and (2) however. All the commodity imports China needs can be bought with dollars, I suspect. And with its strong state and capital controls, China can handle hot money inflows better than anyone.

    I suspect Japan, and perhaps Europe, will start carrying more of the “burden” of supporting the dollar as China necessarily pulls back — and simply buying fewer US t-bills constitutes pulling back. Japan’s appetite is infinite for all practical purposes while in deflation (I realize some disagree with me here) and the Europeans (as you’ve argued) may be forced into this role against their will. But can’t the Chinese play chicken with the BOJ and ECB — and win?

    Gen’l Glut

  • Posted by Silent E

    1) RMB depreciation means commodity prices will rise for Chinese manufacturers, but not enough to matter: Because China is exporting to the US, to the extent that the increase in commodity prices is raising Chinese costs, it is a cost that US consumers will have to pay somewhere. It does not put China at a disadvantage, but rather is a cost that can be somewhat set off against a Chinese price of labor kept lower by devaluation.

    E.g., if Indonesia jumps from USD and appreciates its currency, US consumers of Indonesian goods will pay for higher raw commodity prices and higher Indonesian labor. But those US consumers looking at a competing Chinese product, if China holds the peg, would only be paying for the increased commodity costs because Chinese labor costs wouldn’t rise.

    Indeed, this holds to any of China’s trading partners. It seems rising commodity prices are only detrimental to the section of Chinese manufacturing that relies on imported commodities in producing goods for the Chinese domestic market. And that is a small section indeed…

    Rising commodity prices nonetheless can act as a brake on domestic capital investment, reducing the effects of low interest rates. Yet, although domestic investors see commodity prices rising, foreign investors in China (Non-US) don’t – for them, commodity prices are constant while Chinese labor is now cheaper than ever. So FDI can increase!

    As for equity bubbles and frothy property markets, the advantage from low interest rates in China will drive up prices.

    In the MOF – PBOC game of chicken we’ve got going, I’d put my money with China. As long as China thinks its internal security requires strong US demand for its imports, other Asian economies will be reluctant to let China run away with the market. Japan has to be aware that when USD depreciates, US exports will compete more directly with Japanese firms than Chinese, while American consumers with reduced income will be cutting back on premium Japanese cars, electronics, and tech before they cut back on cheaper Chinese-made essentials. Japanese firms are very exposed, and while China may be able to ride the dollar down by itself, I doubt if Japan can afford to stand back and watch that happen.

    I think Asia’s central bankers are about to find out just how big China really is.

    PS: notice in this that Europe becomes almost an afterthought! But for China, it’s a possible bonus: if China follows the dollar down while the Euro keeps appreciating, that makes Chinese trade gains in Europe even more likely.

  • Posted by anne

    There is increasing reason to believe Japan is slowing again. If so, I imagine the Japanese central bank again will be buying dollars. I imagine this will be soon, and I see no limit to purchases that can be made.

  • Posted by anne

    Chinese Premier Signs Trade Pact at Southeast Asian Summit

    VIENTIANE, Laos – China moved a step closer to cementing its economic and diplomatic relationships with Southeast Asia on Monday when Prime Minister Wen Jiabao signed a trade accord at a regional summit meeting that calls for eliminating tariffs on a range of agricultural and manufactured goods by 2010.

    He also signed a strategic declaration that commits China to good behavior in the Southeast Asian region, including the contentious area of the South China Sea.

  • Posted by brad

    glut, not so silent e — nice discussion.

    do not fully agree.

    I have never been to mainland China, and have not been to HK for a while, but my sense is that a lot of China’s commodity imports are going into domestic consumption and investment, not just exports … all the buildings rising in Shanghai take lots of steel, and thus lots of Australian and Brazilian iron ore. Not all China’s oil imports are turned into plastic and shipped back to the us.

    Since commodities are priced in $ and the renminbi is tied to the $, what matters for china is the commodity/ $ XR — and commodities are up big time in dollar terms.

    glut — the PBoC reserve data suggests inflows into China picked up in q3 — rising from @ $30 billion to @ $ 45 billion. So right now China is assuming a rising burden of supporting the dollar. Whether they buy treasuries or agencies or ABS does not matter so much; what matters is that they are buying US dollar denominated assets. The fact that inflows picked up in q3 leads me to wonder how effectively they are able to control inflows — it is clear from recent PBoC comments that they would rather have less inflows (speculation) and fewer reserves.

    Can China hold out for a bit longer — sure, if they keep running up their reserves at their current pace. Will ECB enter in? who knows. Will the MOF/ BoJ blink — likely. Will this generate enough funds to cover the full US current account/ financing need in 05, if us consumption growth stays strong — doubtful. It might if the ECB entered in a big way, or if ECB internvention set a floor under the euro/$ and led private investors to move from euros to dollars. But USA will need more than $700 billion, barring a major change, if oil stays where it is now and import growth stays strong … that is more than China or even China + Japan can provide.

    one final constraint on chinese undervaluation — protectionism. watch it rise if China holds the line, both in the US (auto parts, furniture) and europe (china and the US have been depreciating big time v. Euro … ).

    But if USA continues on its current track everyone is gonna be unhappy and blaming each other … see S. Roach.

  • Posted by anne

    August 18, 2004

    Across Asia, Beijing’s Star Is in Ascendance
    By JANE PERLEZ – New York Times

    NEWMAN, Australia – Chris Dunbar watched as a front-end loader carved into a 60-foot wall of iron ore glinting in the red dirt of a vast open mine in the big sky country of northwestern Australia. “This is as good as it gets,” said a satisfied Mr. Dunbar, 47, a manager with more than 20 years of experience.

    He was boasting about the richness of the blue-black ore at the Mount Whaleback mine, but he might as well have been bragging about the boom that has propelled economies across the Asia-Pacific region. These days, Australian engineers – like executives, merchants and manufacturers elsewhere in the region – cannot seem to work fast enough to satisfy the hunger of their biggest new customer: China.

    Not long ago Australia and China regarded each other with suspicion. But through newfound diplomatic finesse and the seemingly irresistible lure of its long economic expansion, Beijing has skillfully turned around relations with Australia, America’s staunchest ally in the region.

    The turnabout is just one sign of the broad new influence Beijing has accumulated across the Asian Pacific with American friends and foes alike. From the mines of Newman – an outpost of 3,000 in a corner of the outback – to theforests of Myanmar, the former Burma, China’s rapid growth is sucking up resources and pulling the region’s varied economies in its wake. The effect is unlike anything since the rise of Japanese economic power after World War II.

    For now, China’s presence mostly translates into money, and the doors it opens. But more and more, China is leveraging its economic clout to support its political preferences.

    Beijing is pushing for regional political and economic groupings it can dominate, like a proposed East Asia Community that would cut out the United States and create a global bloc to rival the European Union. It is dispersing aid and, in ways not seen before, pressing countries to fall in line on its top foreign policy priority: its claim over Taiwan.

    China’s higher profile is all the more striking, analysts, executives and diplomats say, as Washington’s preoccupation with Iraq and terrorism has left it seemingly disengaged from the region, which in turn has found the United States more off-putting and harder to penetrate after Sept. 11.

    American military supremacy remains unquestioned, regional officials say. But the United States appears to be on the losing side of trade patterns. China is now South Korea’s biggest trade partner, and two years ago Japan’s imports from China surpassed those from the United States. Current trends show China is likely to top American trade with Southeast Asia in just a few years.

    China’s prime minister, Wen Jiabao, as much as threw down the gauntlet last year, saying he believed that China’s trade with Southeast Asia would reach $100 billion by 2005, just shy of the $120 billion in trade the United States does with the region.

    Mr. Wen’s claim was no idle boast. Almost no country has escaped the pull of China’s enormous craving for trade and, above all, energy and other natural resources to fuel its still galloping expansion and growing consumer demand. Though the Chinese government’s growth target for 2004 is 7 percent, compared with 9.1 percent for 2003, few are worried about a slowdown soon.

    In Thailand, where the United States maintains its second largest embassy, Prime Minister Thaksin Shinawatra, who is of ethnic Chinese descent, is considering building a pipeline across the southern Isthmus of Kra that would give China quicker access to Middle East oil.

    In Malaysia, where exports of gas, palm oil and midrange electronics to China have soared, the new prime minister, Abdullah Badawi, chose to make China his first major overseas visit. He was accompanied by 800 business executives.

    Chinese executives and diplomats, sensing the advantage that comes with one of the world’s fastest-growing economies, have extended their reach to the point that China is increasingly seen as the go-to neighbor, diplomats and other analysts say.

    Many here already contend the future belongs to China. A new generation of political and business leaders is placing its bets now on what is nearly universally seen as China’s rise – and hedging against a possible waning of American influence.

    Even as America’s position erodes, its policies – on Iraq, North Korea, weapons proliferation – have tended to push China and its neighbors together. Not least among the shared interests is a “mutual concern about the unilateralism” of current American policy, said Muhammad Noordin Sopiee, chairman of Malaysia’s Institute of Strategic and International Studies.

    “They need regional friendship, we need regional friendship,” he said of the Chinese. “They need time to develop their economy, so do we. They need protection from the United States and so do we.”

    “Sometimes you see the glint of steel,” he added of the Chinese approach, “But they hide it. They want to be friends.”

  • Posted by anne


    Protectionism is a fun word for pushing China about, but my sense is China is past the time of pushing. Remember the incident in which a Chinese fighter clipped an America military plane tracking along the Chinese coast? The American plane landed in China and we at once demanded release and return of the crew and plane. But, demands gradually became a tempered American apology. China is different than before. China can be engaged in tough negotiations, but not pushed.

  • Posted by Jeff Fisher

    Associated Press
    Official: China to Build Oil Reserve
    Thursday December 2, 9:56 pm ET
    Official Says China Plans to Build 90-Day Strategic Oil Reserve
    HOUSTON (AP) — China plans to build a 90-day strategic oil reserve, much larger than many analysts were anticipating, according to a Chinese official.
    The size is in line with guidelines set by the International Energy Agency, said Pei Jianjun, an official of the Energy Bureau of the Chinese Cabinet’s National Development and Reform Commission.
    Pei was speaking Thursday at a conference on strategic oil reserves organized by the U.S. Energy Department.
    The buildup could increase pressure on global oil supplies in the coming years, but Pei said China would do its buying gradually.
    “We will use the IEA’s 90-day guideline,” Pei said. “However, due to the specific situation in China, we will start with a lower number and increase as it evolves.”
    Such oil reserves are meant to insulate a country’s economy from interruptions in imports.
    China has disclosed that it is building facilities to stockpile the equivalent of 30 days’ worth of oil imports.
    Due to be completed in 2010, those facilities consist of four oil-storage sites along China’s coast with a combined 14 million metric tons of storage capacity.
    The reserves will be mostly crude oil, not refined products, Pei said.China hasn’t decided how much it will add to the reserve this year or in 2005, he said.
    China is expected to consume 6.3 million barrels of oil a day this year, according to the IEA.

  • Posted by Guest