The exponential growth of foreign assets makes me wonder how China has been able to pay for all of this. Relative to the size of China’s trade surplus the growth in foreign assets is so enormous it boggles my mind how all this foreign asset growth has been, and will be financed. A trillion would be four times their 2007 trade surplus, wouldn’t it?

It’s something that has been talked about, but there is an interesting dynamic in that because Chinese banks don’t have the risk control and management systems Western banks do, they are required to take fewer risks.

One thing that has to be looked at is whether the risk and credit management systems that Western banks used actually reduced risk, or whether they led to a false sense of security and led Western banks to take risks that they should not have.

One clear example of this is mortgage securitization where having a computer model telling you that everything is all right might prevent you from going out to talk to homeowners, look at all of the house flipping, and realize that everything isn’t all right and the computer models are giving bogus answers.

Money changers exist and they are tied to commercial banks (they must be). And commercial bank reporting of FX to SAFE is extremely well administered.

RH: “The obvious policy response could of course be that all fwd business would require 100% cash collateral in CNY”

PBOC doesn’t care how banks hedge FX. Also, for the banks themselves, with regards to FX forwards, they do require order 10% collateral on FX forwards for their tier 2 customers. As you probably know, some customers require no collateral because they have big facilities to draw down on, some of which is apportioned to treasury products.

Most of the major banks are all traded on HK exchanges and are subject to the same reporting requirements that Western banks are. So you should be able to figure something out from the securities filings to HK regulators and other disclosure documents.

You said: “The reason why is that if the Chinese government felt that boosting exports was the best way of stimulating demand, it would write the US a nice big loan for $500 billion which would be used to buy Chinese goods. I really don’t see the US tearing up this check rather than cashing it.“

This has been going on for too long now. The US is credit market is contracting. Overextended institutions need money to cover losses, but they are currently not generating new business. This will hurt the demand side in the US and therefore the supply side in Europe and China.

Has China enough cash to buffer job losses? What is the financial situation of the “new middle class” in the hot spots like Shanghai? Will they “just lose savings” or did they use credit to buy real estate and stocks as well? We hear reports of Chinese companies struggling for money. It is hard to imagine that this will not affect their works, who are customers of retailers.

I worry that China is trying to “grow out of the problem”, because this strategy has worked pretty well. The landscape in its main markets has change. And I fear that this will stall internal demand.