BIS Report: China Not Keeping Dollars
The Bank of International Settlements, widely known as
the central bank of central banks, reports that China
and OPEC members are increasingly repatriating their foreign
earnings, instead of traditionally keeping them in US
dollars. This has accounted for the fall of the US dollar,
which has fallen against a new low against the euro, the
world's other leading currency.
Yesterday, the dollar had fallen so low that the Japanese
central bank intervened to buy dollars, according to reports.
During Chinese premier Wen Jiabao's visit to the US,
President Bush will personally ask the premier for "firm
actions" to allow the Chinese yuan (RMB) to float
upwards against the dollar. It is currently pegged at
8.28 to one US dollar. Premier Wen will ask for guarantees
that the US will not invoke import sanctions against Chinese
products. In addition, he will ask the US administration
to scrap export controls on hi-tech products from the
US, which he described as a leftover from the cold war
period.
The US's current currency policy is largely a replay
of the 1985 Plaza accords, which devalued the US dollar
by more than 50 percent against the Japanese yen. At that
time, Japan was considered the trade bogeyman, running
up a large trade deficit against the US. James Baker,
then the treasury secretary during the Reagan administration,
negotiated the accords. As a result, the dollar fell by
more than 50 percent in an 18-month period. This in turn
led to the rapid appreciation of Japanese land prices,
creating a bubble which popped in 1990 and sparking a
recession from which Japan is still recovering. So far,
different Japanese administrations have not yet been able
to act decisively to remove the bad debt which is on the
books of many Japanese banks. Over the years, the situation
has actually worsened, and the current administration
has had to intervene and nationalize Ashikaga Bank, a
Japanese provincial bank, to keep it from collapsing.
China's financial situation is much more complicated
than Japan's in 1985. Unlike Japan, it is already saddled
with an estimated US$500 billion in bad debt left over
from financing China's state-owned enterprises, which
still account for 75 percent of GDP. While the NRDC (National
Reform and Development Commission) and CBRC (China Banking
Regulatory Commission) have both tried to reform the economy
and financial sector along market principles, they have
run into considerable resistance and foot-dragging from
special interest groups which would lose their financing
and special privileges under the proposed reforms. China's
growing consumer sector has attracted more than US$100
billion in foreign direct investment this year, but at
this stage, it's impossible to tell how much of the investments
are going to new internationally competitive businesses,
and how much are going into decrepit state-owned enterprises
which get to prolong their existence, and create more
bad debt, because of robust consumer demand.
While private companies in China are growing, they have
a difficult time gaining access to financing to fund growth,
which is why many seeking listings on overseas markets.
So far, the Chinese government is focusing all its financial
reforms on the country's four major banks, and has totally
ignored reforming the country's domestic stock exchanges.
At the same time, China is undergoing a rapid urbanization
program, which will see more than 200 million rural Chinese
moving into newly-constructed cities in the next 20 years.
Looking at China's reforms this way, it's not hard to
see why the Chinese leadership looks at any drastic revaluation
of the Chinese yuan along the lines of the Plaza accord
as suicidal.
Yet, that is what the Bush administration is pressing
China to do. China is the US's second largest buyer of
Treasury bonds after Japan, and a revaluation of the yuan
upwards against the dollar would result in a de facto
devaluation of bonds already purchased and now held by
China.
It's hard to understand taking a stick to your creditors
to get better terms, especially when your debt is getting
bigger and bigger, but that is what's happening. Faced
with a US administration which is all stick and no carrot,
and is only focused on one clear political goal, winning
the 2004 election, it's hard to be optimistic in the short-term.
Before you go, did you like this article?
If so, you can receive a free email newsletter version
each weekday. Sign up using the China Business Express
form on this page.
