China’s currency, reserves: What if the dollar remains strong? And commodities return to the mean? In other words the dollar is rebounding from years of depreciation and oil, soybeans, copper are still overpriced. Oil was at $10/barrel a decade ago and I know that 2009 is not the first occurrence of Peak Oil in my lifetime.
Really, the stuff is everywhere. And ya, there really is an ocean of natural gas beneath our feet. I also know you can make money with soybeans at $5.50/bushel rather than $15.

Point is — China’s currency is not going to strengthen significantly. Reserves for an indefinite time. Yes, they will buy anything “explicitly” backed by U.S. — thank Paulsen and crew for defining implicit as nada. When world economies begin to stabilize Chinese investment will go more into assets: big time in US, but also anywhere with resources. Note that while we send soldiers everywhere, the Chinese send businessmen and bankers ( like commercial bankers, we have them too, but nobody has noticed ). Africa is a great example.

So to be a player we need a new batch of connecteds to run the investment banks and the Treasury. Otherwise, China will helplessly watch us wallow. Could Geithner’s remarks on one day to China and the next to Japan told better who the new water boy is?

14 year China veteran.

It’s just not looking that great right about now.

C

“And perhaps it is because China hasn’t been buying dollars because it likes the dollar or because it likes US policy. It has been buying dollars because it has pegged to the dollar and runs a large current account surplus. Absent sustained hot money outflows, that implies ongoing Chinese purchases of foreign – and likely US – assets.”

Assuming this is true, if I were the Chinese I’d be getting very, very worried that the whole thing was spiralling out of control. Back when the deficit was in the $150-$250B range, China could count on having a pretty major say in the strength of the auctions. But as David HK noted, the enormous rise in the debt is giving nervous investors more power over China’s holdings. Pretty soon, their massive store of Treasuries will turn into a game of Russian Roulette where they squeeze the trigger every time a macroeconomic event occurs that might start the stampede.

I think that’s the reason they’re moving into short term loans. Like everyone else, they want to be close to the door.

As for Mutually Assured Economic Destruction, I would rather be in their position than ours. If a catastrophe occurs such as a US default, I’d take their tough, self-reliant population over our culture of take-without-earning any day of the week.

Viktor. China’s dollar risk is fundamentally unhedgeable. That is the risk that China’s government has to bear to sustain a global system where the US runs a large deficit. the only way china’s government can reduce its risk (other than adjusting so it no longer runs a current account surplus) is by increasing domestic Chinese demand for dollars, so China’s own citizens build up their foreign portfolio and take more dollar risk.