http://globalinvestmentwatch.com/2008/11/07/the-rise-of-sovereign-wealth-funds-part-iv/

I wasn’t saying that China’s FX assets could be used for stimulus; quite the opposite. I was observing that the reason that the U.S. is in a unique position is that it has no FX risk (its assets and liabilities are in the same currency).

China would have to sell dollars to get RMB to spend domestically out of its FX reserves. Which is exactly the opposite of what it wants to do to create more export led growth.

Chidambaram:

1. There is a (huge?) short on long treasuries, does look like s naked or phantom somewhat + some edgy ones must cover here and there
2. I don t see China as naked on Treasuries (as in some other places), Chidambaram – are you saying you do?
3. Fed s obviously and finally decided sth on y curve s to be done

All in all applause on the crunch marketing are in order as the $ flight from EMs to this quality-stuff truly boggles my mind – it s almost succeeded in laying the yield curve down flat on its back on abscissa, were there not swaps, Fed s recent incentives on shorts and short of this short, taken to account. I d almost say that the Fed s been busy keeping governments borrowing costs up, cross the curve. now they ll reshuffle some bits off and hide out the others. anywyz –2 fed: keep up all the great work and

2 brad and all others: happy thxgiv.

At least in the case of AIG, it looks like the US government is taking on large foreign liabilities rather than assets (AIG’s CDSes were issued mostly by its London office, and many of these swaps were reportedly written to Eurozone banks for purposes of regulatory arbitrage.).

One thing I’ve realized is that looking at the geopolitical context gives fresh insights to expect the direction of economic policy.
China needs to ensure that the 600 million or so people in the interior who continue to live in poverty and aren’t benefited much from the export sector don’t rebel against the communist party.
According to me China shouldn’t have any problems with imports even if she brings the dollar denominated forex reserve down to zero. Petroleum supplies can come through the new Kazakh oil pipeline while several bilateral agreements ensure other imports without dollars.
If you remove wage differentials China has much less to rely on in terms of competitive advantage in manufacturing. This should lead to a policy to increase local demand through a larger stimulus and build a situation where China is not so dependent on foreign sales to sustain the local economy.
If China were to aggressively sell Treasuries at the beginning of a month it could easily trigger a sell off in the market. That was the classical scenario of a hard-landing collective exit to the prisoner’s dilemma game with the Pacific Rim countries. There would be limited post facto geopolitical recoil because it doesn’t seem to me that it’s possible to determine from monthly data exactly who triggered the sell off.