(hopoe you’re still reading this post) Statutory reserves requirements are effectively a way of discouraging the bank from expanding its balance sheet, and can be required in anything that is somewhat costly to set aside.

That may be the case when reserve requirements are based on balance sheet item size. the PBoC requirements seem to be based more on policy rather than bank bs items, if this is erroneous, my apologies.

I find it amazing that we really have no clue how all this is done; apparently the US is allowing the big Chinese state banks to set up branches in the US b/c the CIC promised they would act “commercially” but it is hard for me to see what that promise means when the banks are being used as a tool of fx management and potentially given undisclosed insurance v fx moves in compensation.

Joey — thanks for your kind words. My big fears would include:

a) a major collapse in investment in china that pushes China’s current account surplus up/ ends RMB appreciation (as China tries to export its way out of trouble even though it exported its way into the current position)/ brings commodity prices down sharply.

b) a major supply disruption in the oil market (oil is above $130 w/o an event comparable in its scale/ impact to the iranian revolution and the resulting interruption in supply)

c) a sudden end to Central bank financing of the US and a disorderly run out of the $

d) a failure on the part of the US to adjust now (in part b/c of excessive central bank financing) and a resumption of consumption led growth a few years data – i.e. a story where someone us external vulnerabilities continue to build.

Simon — I very much agree with your point that China needs to move swiftly to rebalance its relationship with the US (and for that matter Europe)

I had another thought. I’m an engineer and I understand physical systems quite well. It seems to me that economic system exhibit some physical properties. One such property being that imbalances can not proceed beyond a certain point before something snaps. The bubble pops so to speak and equilibrium re-establishes itself. There are lots of dynamic physical systems but they all have in common a point beyond which elastic becomes plastic and finally failure occurs.

As engineers we understand that brittle failure is to be avoided. We design, structures in my case, to fail in a way that limits loss of life by yielding but remaining standing instead of collapsing suddenly like a house of cards which would squash all occupants.

It seems to me that the FED at present is trying to engineer a slow failure or decline in the US economy. This makes sense to me. It protects the most active participants allowing for a swifter recovery later on.

My concern is that if the Chinese financial authorities do not do something swiftly to re-balance their relationship with the US there will be an almighty bang and something important will break. The re-balance can be orderly, the engineers preference, or swift and nasty, the outcome that takes the longest to recover from.

As I said earlier, you seem to be the authority on many economic issues, so my question to you is likely a question that many non-economists like myself ask you quite regularly: What scares you the most in regards to the U.S. economy and the global economy? I’ve been following your posts for a little over a month and have picked up on a few potential problems that you predict will likely have some serious consequences within the U.S. and ripple throughout the global economy. But I am curious as to what event scares you the most, whether the event is currently underway or likely to rear its ugly head in the not-so-distant future.

Thanks again for all of your insights and a big thanks for acting as an excedrin for my many economically-engineered headaches.

China comes definitely from a background of mercantile monetary policy. Like her neighbors Japan, Korea, Thailand and Malaysia. And, of course the other parts of Greater China.

On top of that, despite the ongoing deepening of the industrial sector, the strategic role of Japanese, Taiwanese end lately also Korea firms is still considerable. And they think in USD and like their USD costs stable which they can make very clear (own observation in Malaysia when they considered revaluing the Ringkit after pegging it under loud IMF protest in 1997). China is in transition from many things (communism, statist economics, rurality and semi foreign (HK/Taiwan) domination of private sector industialisation), and is probably already immune to the type of blackmail I mentioned earlier but it still has a fair bit of river to cross. Who knows what the next stone may bring. But probably not stiring the FX pot

You are correct that China could sell off dollar reserves and cause the dollar to collapse at any time that it wants to do so. However, they will not do so because by keeping the dollar high, relative to the yuan, they are able to steal market share of our industries.

They are very unlikely to cause the dollar collapse before they have finished stealing our remaining industries, including our automobile production, heavy machinery production, appliance production, and airplane production industries.

Their strategy is working right now, so why should they change it?

Howard

Elaine Meinel Supkis was correct when she wrote “China is successfully imitating Japan.

You were incorrect when you responded, “The only thing that are common between China and Japan are things that are commonly true throughout the world.”

Japan invented the strategy being followed now by China that Aizenman and Lee dubbed “monetary mercantilism” and defined as “hoarding international reserves in order to improve competitiveness.”

The fact that they are following the same strategy is evident from their enormous currency reserves. The difference is that Japan has recently slowed its accumulution of reserves while China has been continuing to accelerate its accumuluation of reserves.

Howard Richman
http://www.trade-wars.blogspot.com

I guess the problem is that they would no longer have anyone to sell to. That would be a return to their historic position of isolationism. And reassert their belief in their innate superiority.

In fact in terms of productivity they ARE superior. They have worked the West into a ditch.

Are all the tables about to be turned over in this bar?