China’s central bank governor and the USD

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There are at the moment some unconfirmed reports that China’s central bank governor, Zhou Xiaochuan, has defected to the United States. Among the reasons given for his possible defection are large losses made by the central bank on investments in US Treasury Bonds. One can only speculate at this stage, but presumably the next central bank governor would be a lot more reluctant to invest in US assets! Which will make the financing of the US public debt much more challenging, as well as lead to a much weaker USD. A story worth watching!

8 Responses to "China’s central bank governor and the USD"
  1. From Robert Gottliebsen’s report on the Hayman Island conference:

    “In most years something very memorable occurs at the Australian Leadership Retreat on Hayman Island. Last year the Chinese were stopped from attending because China discovered that the then Prime Minister Kevin Rudd would be in attendance. Rudd had fallen out with the Chinese leadership (Building bridges with China, September 1 2009).

    In 2010 Rudd was not there and the Chinese came in force and some of their messages are still ringing in my ears.

    By far the most dramatic was the declaration that China did not plan to buy any more US treasury securities or bonds. The person who made the statement does not make that decision, but he is closely connected to the China hierarchy. He explained that the $US2.5 trillion of China’s foreign reserves held in US dollars was burdensome because it limited the flexibility of monetary policy and any appreciation of the Chinese currency would cause loss. China would therefore not be a buyer of US dollars but would not sell. China would look to diversify its holdings and was a buyer of European and Japanese government bonds as well as other currencies.”

    http://www.businessspectator.com.au/bs.nsf/Article/Chinas-Hayman-declaration-pd20100830-8STYD?opendocument&src=rss

  2. I wonder how he managed to make losses when US treasuries are at record highs.  Perhaps he has been shorting them.

  3. It would be worth noting that the US Govern WILL NEVER have trouble financing its Public Debt as it is all denominated in USD and the US Govt is the monopoly issuers of US Dollars.

    This article may be of interest: http://www.cepr.net/index.php/blogs/beat-the-press/cnn-money-wants-you-to-be-scared-about-the-deficit

    “[anyone that has] access to financial market information…would know that the interest rate on U.S. government bonds are near 60-year lows. This suggests that financial markets are not at all worried about U.S. government debt.”

  4. These would be the same financial markets that were not worried about mortgage backed securities 3 years ago. I think it is interesting that these types of rumours get reported at all. About 4 years ago a report came out from a minor Korean central bank official that Korea’s central bank wanted to diversify their FX reserves. The USD fell before this rumour was denied. George Bush’s statement on that same day that he was for a strong $ had no impact on the USD value. At some point the same will happen to US bonds and $ – far fewer buyers and therefore far more subject to whim and rumour, and prices reflective of fundamental (low) value, rather than a view that the US is a “strong” economy.

  5. I think the rumour is false but its an interesting rumour.

    http://www.bloomberg.com/news/2010-08-31/japan-regulator-met-zhou-in-beijing-dispelling-speculation-he-left-china.html

    Have there been big losses recently on foreign exchange holdings?  The indicated losses of about $470b are 20% of total Chinese reserves – I can’t figure how that could be true.

    The rumour presumably reflects wiidespread fears that huge losses could be sustsined in the future. That is interesting!

  6. Those rumours about the size of the losses to date aren’t correct, but clearly you’re right about fears of future losses. Chinese students laughing at Tim Geittner’s claims that China’s USD holdings were safe were not laughing in agreement!

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