my response would be:

a) China played a role in allocating credit to the US (i.e. if it had been buying euros, private investors wouldn’t have supplied the same amount at the same price even if the china bid drove down euro rates/ drove the euro up)

b) China’s demand for treasuries and agencies contributed to low rates that favored itnerest sensitive sectors of the economy over other sectors, and particularly sectors in the non-tradable side that were insulated from chinese competition. that is influencing allocation at a macro level

c) China’s demand for agencies led to more mortgage financing from 05-07 than would have been the case had China bought only treasuries.

I have the least conviction on c) tho

The only way China’s USD savings can enter the US financial system is via the US treasury (including Agencies for simplicity’s sake). That means that those US investors who would like to (or must for regulatory reasons) must buy riskier securities. If they do not, non-government users of funds will have to borrow from professional lenders (during the past ten years much commercial bank-type lending has come from non-bank sources) and those professional lenders may need increasing gvt support. The US gvt is not only the lender of last resort to the banking system (through the FRB system) but it is now also the deposittaker of last resort.

Stil, I think that it depends on how you define “credit” if this is supposed to give China a role in allocating credit in the US. But I would agree wholeheartedly that th US gvt by having a peculiar ensemble of policies, has managed to put itself in a position where the government is getting very close to crossing the line between macro-economic intervention in the financial system (a role generally regarded as appropriate for a market economy) and micro-economic intervention, a role normally associated with the financial systems of France, Japan, Korea and even pre-WWII Germany. Surely no one could have wanted that.

Brad, I do not know. It may be a problem, it may be not. Anyway, I am pretty sure that China does not want to have anything to do with the allocation of credit in The US in the sense most people would understand. This topic is alike a good putt that misses the hole, close, but no cigar..

that would suggest ongoing “hot inflows”, albeit at a lower pace. the fall in the expected apprciation in the NDF market suggests much smaller inflows, as the two seem to have been reasonably correlated in the past. here tho i would put less faith in the forward market than the central bank data.

Now the oil-price is falling.

I have earlier claimed that the graphs of the oil-price and of the Chinese central banks reserves are inter-related.

Thus I propose that Chinese reserves have now started falling. I think Brad will write about that, but it will take another 1-2 months.

August 6th, 2008 at 3:42 pm
bsetser Says:

Stefan — wow, what do you know that I don’t ….

china’s trade surplus is around $20b a month
FDI inflows are in the $5-10b range
interest income isn’t small any more. 4% on $2 trillion is $80b a year, or over $5b a month

sum it up and reserves should be going up by around $30b a month even without any hot money inflows …
___________

Now one month has passed and we really have to think what direction the hot money is actually flowing. Could it be that foreign capital earlier went into China en masse pushing up prices of all kinds of assets, creating surpluses in the Chinese reserves. And could it be, that a large part of this foreign hot money is now desperately trying to get out of Chinese assets creating a decline in Chinese reserves. I think so.

The Chinese economy will maintain its 8-9% growth trajectory due to heavy state capital expenditures on infrastructure development. A partial list of massive Chinese state spending industrial projects:

http://web.wenxuecity.com/BBSView.php?SubID=mychina&MsgID=342922

EDITED FOR LENGTH

I heard Putin address that a couple years ago. He said strong oil prices/exports have strengthened the ruble substantially, but that has made it difficult on the rest of Russian industry exporters.

So I think they have trouble playing catchup with capitalism, and they think need to depreciate.

Of course now the Georgia situation helps devaluation greatly.