♠ Posted by Emmanuel in China at 5/10/2011 12:00:00 AMAnd there's probably more to come as "strong dollar" policy hilarity continues. Having accumulated $3 trillion in reserves--two-thirds of which are thought to be denominated in US dollars--the Chinese have finally marshalled enough courage to estimate their losses based on the declining value of the aforesaid currency. Never let it be said that this was ever going to be a pretty picture, although many commentators have warned China its accumulation of foreign exchange reserves was far in excess of what was necessary by conventional standards of reserve adequacy such as three months' worth of imports. China is way past that point now. $1 trillion having deemed unimaginable for a developing country all those years ago, what the heck can anyone meaningfully say about having $3 trillion? These sums are mind-boggling; so are the losses. From China Daily, still our favourite official publication:
China suffered a loss of about $271.1 billion on its foreign exchange reserves accumulated between 2003 and 2010, because of the depreciation of the US dollar, said a senior analyst at the National Development and Reform Commission (NDRC). And the country is likely to lose $578.6 billion if the US currency's exchange rate sinks to six yuan a dollar, Securities Daily quoted Zhang Anyuan, head of the fiscal and financial policy research division of the NDRC's Institute of Economic Research, as saying on Thursday.Hence the euro diversification play, although you have to wonder what will happen if Greece gives its bondholders a haircut--but more on that later...
"This amount of loss cannot be offset by the country's overseas investment earnings," Zhang said in a recent article, according to the report. Zhang said that diversification of China's foreign exchange portfolio is already crucially urgent for the country to maintain the value of the assets...
By the end of March, China's foreign reserves had increased by $197 billion to more than $3 trillion for the first time, a rise of 24 percent from the previous year, despite the first quarterly trade deficit in seven years during that same period. Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said in April that the holding has exceeded a "reasonable" [now insane?] level and the management and diversification of the portfolio needs to be improved.
China indicated in April that it was ready to buy more debt from the eurozone's weaker states, in a move to help stabilize the bloc's fragile finances and protect its business interests. It was considering purchasing more after investing billions of euros in Portuguese and Greek bonds to diversify its foreign reserves away from the dollar, said Song Zhe, China's ambassador to the European Union.What the heck to do with all these FX reserves, that is the question:
The country is also planning to invest in Spain, including participating in the reorganization of the troubled Spanish savings banks, the Ministry of Foreign Affairs said earlier in Beijing. Although the government is well aware of the necessity to diversify its foreign exchange assets to lower risks, other options cannot match the strength and security of US debt in the short term, said Wang Jun, economist at the China Center for International Economic Exchange...
On April 19, Foreign Ministry spokesman Hong Lei urged the US administration to adopt "responsible policies and measures" to protect the interests of investors. Zhang Jianhua, head of research at the PBOC, the central bank, said that concerns about a possible failure of the heavily indebted US government to repay its debt could drive Treasury yields higher and cause US debt prices to fluctuate.
Analysts have also suggested that China use the capital to buy energy and resources assets overseas. But such a shift in investment strategy is unrealistic given the various barriers set by foreign governments, said Li Wei, an economist at Standard Chartered Bank in China. The central bank is also planning new investment funds to diversify the foreign reserves holdings, the New Century Weekly reported on April 25. The proposed funds will invest some of the foreign reserves in the energy and precious metal markets, it said, citing unnamed sources close to the central bank.So the losses are mounting thick and fast for China, with a loss of a cool half a trillion in sight in the near future. While the euro diversification play helps a little, the real solution of course lies in not accumulating so many reserves in the first place. To paraphrase John Connally, it's America's currency but China's problem. And in the end nobody forced China to buy all those dollar-denominated "securities." In the end, you have no one to blame but yourself.
It's always sad to tally one's losses and realize how much you've been played for a fool. Worse, the PRC is way past the point of no return in that further, enormous losses on its dollar holdings are inevitable
Then again, the political fallout from losses of such magnitude in an authoritarian state are debatable. Having accumulated so much under such a tightly controlled system without popular discontent, Hu's to say that protests will appear once the magnitude of PRC losses become more apparent?