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Let me add that the accounting identity I am referring to is that the trade surplus must be balanced the capital outflow. Since it is an identity it must be tru
by fspeech 11y ago
Let me add that the accounting identity I am referring to is that the trade surplus must be balanced the capital outflow. Since it is an identity it must be true in the past as well. It is just that in the past the private sector (on a net basis) was not very interested so it was the central bank that controlled all outbound investments. And as a result the PBoC has a very large and visible holding of foreign reserves. Now the time has come that the private sector and individual Chinese want to invest the surplus themselves and maybe then some so we see the central bank's reserve holdings falling. At this stage the central bank may be happy to just get rid of some of their excess holdings (also if they don't intervene and let the exchange rate fall they will get even more squawking and name calling overseas). But if it persists to the degree that the central bank runs out of reserves it will be forced to stop intervening in the forex market and then the exchange rate can fall as much as the market wants to, which by the way will make the trade surplus even larger.
- seanmcdirmid 11y agoThe private sector wasn't "not very interested", they were required to sell their dollars to the central bank for RMB. They just were not allowed to hold dollars inside the country. That money was then taken out of circulation by buying US treasuries (what else could China do with it?). There was a time when China wanted to get rid of some of their USD holdings, so they encouraged companies to take RMB, buy dollars, and invest abroad. But taken to an extreme, eventually China runs out of reserves, has to buy dollars on the open market to satisfy demand, and that leads the RMB to de-valuing as they print more to buy dollars. China still has to buy most imported commodities using dollars...like oil. A de-valued RMB will most certainly lead to inflation at home, causing prices to rise. And then Chinese will start hoarding dollars if they lose confidence in the RMB, leading to a sort of death spiral. At this time, China wants to keep money in China, and so is cracking down on banks exchanging to USD too easily. Capital controls are a real thing.
- fspeech 11y agoRight now PBoC is selling dollars, not buying them. This is why the reserve holding is going down. Are you talking about some future event when you said "But taken to an extreme, eventually China runs out of reserves, has to buy dollars on the open market to satisfy demand, and that leads the RMB to de-valuing as they print more to buy dollars."?
- seanmcdirmid 11y agoExactly. China will run out of reserves by about 2018 given the current rate of inflow and outflows.
- fspeech 11y agoI assume that by saying "China still has to buy most imported commodities using dollars...like oil" you are implying that China won't have enough money to buy oil. You do realize that is a direct contradiction to a large trade surplus, right? Or are you predicting that the trade surplus will soon turn into a deficit? If RMB goes into the so called "death spiral" which direction do you think that will push China's trade position?
- seanmcdirmid 11y agoI'm saying that China needs dollars to run its economy, not having dollars anymore can make it harder to run. > If RMB goes into the so called "death spiral" which direction do you think that will push China's trade position? China can't continue being the world's cheap factory. It is horrible for the environment, and it doesn't do as much for normal people as it used to. Say stuff from China is cheaper...so what? Americans and the west win, because China continues to subsidize their wasteful lifestyles, but what does China win? More trade isn't the answer anymore, eventually people actually want to buy things and not just sell them. And honestly, I'm not a trade position.