All the more reason for the Chinese to invest their “money” while its worth something!

The PBoC governor probably is considering investing excess US Dollars into the natural resource sector and international equities. The biggest joke of the century is that the entire world is knee deep with increasingly worthless US dollars.

Chinese mainland becomes Japan’s top trade partner
(Agencies)
Updated: 2007-04-25 16:24

“The Chinese mainland has surpassed the United States as Japan’s top trading partner despite strained ties between the Asian giants.

Japan’s total trade with the Chinese mainland came to 25.43 trillion yen (US$214.8 billion) in the year ended March, against 25.16 trillion yen with the United States, the Japanese finance ministry said in a statement.

“This reflects the gradual shift of production by Japanese firms to China. I think the trend of growing trade with China will continue,” said finance ministry official Koichi Nose.

The United States is still Japan’s largest export destination but Japanese exports to the Chinese mainland have been growing in recent years, while imports are strong.

Japanese manufacturers have been shifting more of their production operations to the Chinese mainland, seeking cheap labour costs and a foothold in the fast-growing economy.

“For Japan, a very large market has emerged next door,” said Senshu University economics professor Hideo Ohashi.

The two economies have strong links through direct investment while the flow of goods has increased sharply, ensuring that trade relations between the two Asian giants are likely to remain strong, he added.

Japan was also Chinese mainland’s largest trading partner for 11 consecutive years until 2003 but was then overtaken by the United States and European Union.”

Diplomatic relations between the two Asian giants became severely strained in recent years over war-time memories and territorial spats.

most derivatives transactions are “off-balance sheet” and don’t show up in the capital flows data.

Other investment is basically bank loans

other investment banks = banks lending to other banks

other investment other = banks lending to firms

what i took from the regional outlook is that derivatives activity often gives rise to real flows that show up in other investment. but i don’t think the actual derivative itself does.

the premiums that the banks receive from selling derivatives should show up in the current account (current income), i think.

to be honest, tho, i would need to spend some time looking at this/ thinking about it. my general sense is that derivative positions rarely show up directly in the data, but sometimes show up indirectly.

Box 2.2 on page 33 gives some insight and examples on banking and derivative flows, which apparently constitute the two types of flows included in the ‘other’ flows category of the capital account as defined in the paper.

The derivative examples used seem to translate to underlying bank flows as the immediate cross border effect – e.g. banks shorting the dollar (borrowing interbank from offshore) as a hedge against the forward purchase of dollars from an exporter, banks increasing their net dollar assets against the forward sale of dollars to their central banks, or banks allowing forward currency contracts to mature (which would change their external classification of assets or liabilities).

The classification framework suggests some derivative flows are not classified as bank flows. But I don’t see examples where the effect of derivatives isn’t reflected entirely in bank flows. What sorts of derivative transactions are reflected in the other category separate from bank flows, and how substantial are they? (I would have guessed the classification distinction is not mutually exclusive, except that the Korean capital inflow chart on page 33 specifically classifies ‘other investment inflows: bank’, and ‘other investment inflows: other’, as separate and distinct.)

Do you know of other articles that provide a good framework for understanding derivatives content in capital account flows?

To quote the professional wrestling “legend” Ric Flair: You can talk the talk, but can you walk the walk? We’ll see when the next batch of reserve data comes out.

Of course, PBOC could simply have referred to the fact that it won’t be them stockpiling reserves anymore- it will be the PIC.

On March 20, 2007, the governor of China’s central bank stated for the first time that they “will not stockpile foreign exchange reserves any more”. This an extraordinarily important comment that few Western pundits took note. The PBoC realizes that ultimately keeping the policy in place will only result in the destruction of the Chinese economy. Too much foreign capital is exploding the domestic Chinese money supply. The US Federal Reserve is equally at fault for printing too many fiat dollars for the past decade.

in addition to buying (access to) gold, minerals and other resources from the emerging world, they’re also rapidly “transferring” technology from the developed world…

if they’re smart they could just buy israel… what’s their market cap; like around $123bn?

While China’s main area of comparative advantage continues to be low-cost manufacturing, the Chinese economy remains dependent on high technology components from elsewhere. The ultra high-tech components from charged coupled devices (CCD’s) to advanced microprocessors must still be imported. For instance, Intel presently only final packages microprocessors in China with the advanced wafers manufactured in the United States, Ireland, and Israel. And while IBM has transferred its global procurement headquarters to Shenzhen, advanced microprocessors are still manufactured in-house at its upstate New York fab. Moreover, Domestic Chinese chip production can only currently meet 30% of China’s internal demand. However, with over a dozen new semiconductor fabs under construction across the nation, the Chinese economy will over time, meet an increasing portion of China’s domestic demand. Often overlooked by Western analysts, Chinese Industrial clustering has been instrumental in supporting the rapid expansion of various manufacturing sectors. With the exception of the core microprocessors, IBM’s global procurement center in Shenzhen is able to acquire almost every other computer component from power supplies, cables, circuit boards, displays from suppliers across the Pearl River Delta. With other Chinese government targeted industrial clusters in Beijing and Shanghai, China will soon move into higher-value-added sectors, such as automobiles, commercial aerospace and pharmaceuticals.