The Capital Wire: FOREIGN CENTRAL BANK ABSENCE

March 2005

November 16, 2004

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FOREIGN CENTRAL BANK ABSENCE

Steve Clemons on whether Chinese/Japanese central bank absence at a Sept. 9 routine Treasury auction portends a global power play:

“...Their mutual absence at the auction may have been a signal to the Treasury Department and George Bush that there will be huge costs to the U.S. economy whether it sides with Japan or, alternatively, with China.

I believe that a missed auction, during these times, is not minor and is probably a signal to the White House that America needs to recognize the subtle leverage that Japanese and Chinese capital holds over the great American empire.

Japan and China wouldn't take this too far because they want Americans to keep buying their myriad products, and to do that, these countries need to keep us addicted to the narcotic of current account deficit financing.”

The motive for their absence was probably less insidious and more a question of sound capital management. The hundreds of billions in holdings of U.S notes and bonds simply looked too risky. To limit large capital losses (which, to a certain extent, they’re willing to put up with in order to put hundreds of millions of people to work), diversification out of dollar assets was/is needed. The prospect that foreign central bank dollar holdings (namely China) become a toolkit for political persuasion rests more on geopolitical rather than economic issues.

Anatole Kaletsky, GaveKal Ad Hoc Comment, Sept 9th: (sorry, no direct link)

"...China will continue to buy dollars and US Treasury bonds rather than accept a revaluation of the Renminbi. The Chinese still see the fixed exchange rate as a source of economic stability and they do not regard the euro or the yen as a serious reserve currency alternative. Deep down, they also consider their US bond holdings as a source of potential leverage in the event of a geopolitical crisis, especially over Taiwan. Potential currency losses on these reserve holdings are simply not an issue.

When we asked a senior Communist Party official who was representing the Chinese government at the Ambrosetti forum how his country benefited from buying US bonds, the initial answer was downright paranoid: ‘It is absolutely not true that we want to use our bonds holdings to pressurize or blackmail the US government. Geopolitical factors play no part in our financial decisions.’ When Anatole pointed out that he had never suggested any such political motives, but simply wanted to know what economic benefits the Chinese people expected from their US bond holdings, the answer was even more instructive:

‘Why don't you ask the Japanese? I think they are buying even more US bonds than we are.’”

--UK

Posted by Uday Karmarkar at 03:46 PM | Permalink

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