Saturday, December 15, 2007

Economics News - Bernanke has a true friend: Beijing

There is still a big buyer convinced to do great bargains by accumulating dollars. Someone who continues to buy Treasury Bonds in dollars and even more the "structured products" with loans indollars. This buyer, which supports the United States from bankruptcy (or at least it tries), is China.

(By Maurizio Blondet,

According to the U.S. Treasury, China (excluding Hong Kong) had, in July 2006, 700 billion dollars in American securities in the long term. Of these, 107 million were "agency bonds, that is packages made up by "guaranteed mortgages "(more or less) from any public entity States. The China bought long-term bonds for $ 2.5 billion in July 2007, it bought still 2.7 billion in August when the bubble of sub-prime burst, and even 8 billion in September, when the colossal dimensions of the crack subprime were known to all.

The behavior seems even more strange by taking into account that China in 2002 bought no more than 100 million of these loans made headlines. In 2006, it had 107 billion: an increase of one thousand percent. As the crisis subprime went on, as quickly as Beijing bought. To this accumulation of USA debt is added that of Hong Kong: the city had, in June 2006, 13.4 billion of USA securities, of which over 5 billion in packaged loans. The exposure of China to the risk of American loans at this point is huge. Why Beijing has continued to increase this exposure so continuous and accelerated?

China is silent on this issue, which adds mystery to the mystery: as a fearless gambler, the Asian giant increasingly bets higher and higher on a roulette that all are abandoning. Leaving the onlookers to wonder: what has already lost the player and how much is he willing to again lose and risk? Perhaps, Beijing has no other choice that this strong game: it is needed to keep its currency low against the dollar, while it is accumulating too many dollars with its exports. A deluge of dollars, to invest where there is no market big enough except that immense of the USA debt.

It seems that Europe invited Beijing to avoid causing a further upward pressure on the euro, buying euros against dollars: the giant is too big, its little moving creates storms, as soon as it invests in a market it make it appreciate in an untenable way.
On the other hand, America continues to import from China at a high rate, and so China continues to accumulate US dollars: if it had to diversified a part of that mountain into euros or other currencies, the effect would be to cause a reduction of the dollar and of the government’s bonds in dollars of wich the State safe is fully.

Inside American politics, the voices calling for protectionist measures against the flood of Chinese goods would become stronger and listened. Maintaining the current exchange rate between the dollar and Renminbi-all in favor of China, which keeps its currency devalued to increase its competitiveness - would be politically difficult.

As China accumulates additional dollars, the incentive to support the dollar grows more, buying securities doubts. After all, those still give a pretty high interest. If it had released dollars too visibly, China would fall the events, causing a greater devaluation of its reserves. The fact is this: Beijing can not afford to lose its biggest customer, even if it is the most indebted: the effects on employment would be dramatic, especially now that the cost of labor is still rapidly growing.

To ensure social peace, the Chinese government has passed a law on employment contracts which will enter into force by January: for the first time, this law defines the rights of workers regarding overtime, pensions, layoffs, and even trade unions. If it will not remain unheeded, this set of rules will cause an increase in the Chinese labor cost of 20-30%. Already now, different Taiwan investors believe that the cost is too high, and they are going away, especially those who had planted small businesses.

In short, evidence shows that Beijing is clearly accepting growing losses to avert even greater losses, to the point of throwing dollars earned by exports, largely, to support the USA estate market. And it is silent, because it does not know what else to do, not having other options for now more desirable. It hopes to gain time.

Beijing is condemned to help Washington: the planetary seller has to finance the global customer. USA and China are linked, unlikely lovers, from the same node: but is not a knot of love, but a loop.

(Source: Max Fraad Wolff, «Sino silence in subprime swamp», Asia Times, December 14th 2007).

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