BIZCHINA / Worldwide Reaction
Reserves: Golden dragon or sitting duck
By Edward Krowitz (China Daily)
Updated: 2007-06-07 10:22
The author Edward Krowitz is an economist, retired from the US Foreign
Service and a former consultant on macroeconomic reform to the United
Nations and the Asian Development Bank
Like good food, good sex or money, can one ever have too much of a good
thing?
With their wishy washy "on the one hand but then on the other " attitude,
one would normally avoid asking economists - except when discussing the
Chinese economy.
Here's what the May 2007 World Bank update has to say about Chinese
economic performance: Growth prospects are good; GDP is expected to rise
by 10.4 percent this year; the stock market is booming, export growth is
surging, the trade surplus is continuing and foreign exchange reserves
are soaring. What's not to like in this picture?
With over a trillion dollars sitting in its exchange reserves, earning
the going rate of 3 to 4 percent for US treasury bonds, barely
maintaining its value in real terms, is China in danger of putting all
its eggs in one very fragile basket?
Recent research by Morris Goldstein of the Institute of International
Economics demonstrated that despite announced changes in a revised basket
of currencies the Chinese currency remains pegged to the US dollar. Why
should this be worrisome?
In two words: portfolio diversification. The safety of one's savings,
even for a nation, should be the paramount consideration in guiding
investment strategy. But with the US current account deficit approaching
7 percent of GDP, the largest ever recorded by any country, questions
arise whether this is sustainable.
The flip side of this is foreign purchases of a growing share of US
financial assets, now reaching 30 percent of GDP. With any action to
correct its imbalances unlikely until after the 2008 US presidential
elections, will America's creditors experience a Woody Woodpecker moment?
Related readings:
Reserve ratios may be further raised this year
Central bank raises interest rates, reserve requirements
China to have more Euros in forex reserve
IMF: China forex move no cause for concern
Economist Paul Krugman uses the analogy to Road Runner cartoons to
demonstrate a sharp, unexpected turnaround in investor behavior.
In these cartoons, Woody is chased by his nemesis, Wilie E. Coyote, who,
during the chase, unknowingly runs off a desert cliff but continues
running, this time over thin air. Nothing happens until Wilie looks down,
realizes nothing is holding him up, and suddenly plunges to the desert
floor below.
Krugman asks if such a scenario is possible with foreign purchases of US
assets which sustain a continuation of the US trade deficit.
1 2
(For more biz stories, please visit Industry Updates)
Learn Chinese, Chinese Mandarin
No comments:
Post a Comment