Actually, China’s exporters are quite happy when the dollar goes down.
All they do is keep the peg in place to gain market share in the rest of the world.
Or even let their currency appreciate some.
So the recent dollar weakness has probably helped their gdp probably more than it helped the US.
But it did aggravate their domestic inflation some which is problematic.
It’s when the dollar goes up that they get worried.
The dollar has been driven down by the ‘qe is inflationary money printing’ hysteria.
A ‘qe does nothing?!’ dollar reversal, if it happens,
should soften their equity markets along with the US equity markets if they hold the peg in place.
China newspaper warns of disaster over Fed move
November 7 (Reuters) — Washington’s latest move to print more money is a form of indirect currency manipulation that could lead to a new round of currency wars and even global economic collapse, a leading Chinese newspaper warned on Monday.
The United States last week announced it would inject an extra $600 billion into its banking system in its latest effort to boost a fragile economic recovery, prompting criticism from a number of countries, notably China and Germany.
The overseas edition of Communist Party mouthpiece the People’s Daily said in a front page commentary that this quantitative easing was bad for China and bad for the world.
“In essence this is an uncontrolled increase in money supply, equal to indirect exchange rate manipulation,” Shi Jianxun of Shanghai’s Tongji University wrote in the guest commentary.
The U.S. Federal Reserve’s actions will “touch off a global competition to devalue currencies … (leading to) a ‘currency war’ and trade protectionism, threatening the global economic recovery”, Shi wrote.
“Exchange rate wars are in fact trade wars, and if they set off a trade war it won’t only threaten the global economy, it will perhaps cause a collapse…and everyone’s interests will be harmed,” the academic added.
The comments were the latest in a string of strongly worded criticisms of U.S. economic policies by Chinese economists and government officials ahead of the G20 summit in Seoul this week.
On Friday, Vice Foreign Minister Cui Tiankai suggested the move by the Federal Reserve would add to financial instability in China and other countries.
For his part, Federal Reserve Chairman Ben Bernanke in recent days has been defending the bond-buying, saying the measures to help restore a strong U.S. economy were critical for global financial stability.
“We are committed to our price stability objective,” he said. “I have rejected any notion that we are going to raise inflation to a supra-normal level.”
However, the People’s Daily commentary asserted that the Fed’s actions will increase inflationary pressure on China and other holders of foreign debt and cause “huge losses” for China’s foreign exchange reserves, the world’s largest at $2.65 trillion as of the end of September.
Cash will flood into financial institutions and go overseas, creating new asset bubbles and “lie in ambush” for future inflation, Shi added.
“Given the present international financial situation, countries should join together to restrain America’s irresponsible behavior of issuing excessive amounts of money,” Shi wrote.
Most of the analysis that I read is that the Fed’s bidding up prices on US bonds will drive savers out of US bonds as bondholders take their profit. Being savers the will then switch to saving somewhere else as comparable risk where interest rates are higher. This will involve the sale of dollars for other currencies, driving up the FX rate of those currencies relative to the dollar, as savers move to foreign bonds with more attractive yields. Some of the funds that are freed up by bond sales will also flow to higher risk, i.e., US and foreign equities. Is this wrong?
Or buy GSE or Munis since you get a risk premium above Treasuries but lets face it… Uncle Sam isn’t going to let a federal corporation much less a State of the Union go tits up (a special thanks to Sen. Alan Simpson for making the words “tits” acceptable in public discourse).
Of course, there’s no reason that the taxpayers shouldn’t capture the rents instead of bondholders. Edward Harrison points out that the Fed already has the authority to buy up any GSE or Muni without congressional authority.
If Congress recycled Tsy’s net interest back to the respective states (California alone spends over $5 billion a year in debt service) or, I suppose, the Fed simply refinanced municipal debt at discount window rates, it would be a huge relief to state budgets. What’s more, if states took advantage of no-interest lending to dramatically expand infrastructure spending, it’d prove a huge benefit to the national economy by boosting aggregate demand in the short term and improving the nation’s infrastructure stock long-term.
cross currency trades are high risk speculation. yes, it happens, with the yen the prime example. but seems ultimately it didn’t weaken that currency?
Warren the fed is buying treasuries from the primary dealers. Isn’t it logical to assume the cash proceeds from fed purchase are going into commodities speculation. If fed was not purchasing no cash thus no speculation on commodities. So we is having big effect even though no new money is being created
It’s absolutely priceless to hear Chinese commentators complain about an “uncontrolled increase in money supply” and an “indirect exchange rate manipulation.” The Chinese economy is essentially dependent on both factors; the hypocrisy is knee deep in Beijing.
I think the real reason China is afraid of QE2 and lower interest rates in the US, is the possibility that the Fed will get the inflation that it wants. At the moment there are massive amounts of inflation in China stored up and hidden in asset prices. If input prices surge it is possible some of this hidden inflation will be released into the economy lowering asset values and further fueling consumer inflation. This is the nightmare scenario for Beijing because it would force their hand and require them to turn off the lending spigot and revalue the currency, and almost guarantee a deep recession that the current social/political structure is poorly designed to cope with. For more on the hidden inflation go here: http://chovanec.wordpress.com/2010/10/22/bloomberg-chinas-hidden-inflation/
Isn’t 600 billion dollars just a drop in the bucket relative to all the assets that the US holds?
Seems like a huge over reaction.