the visible hand

it is the theory which decides what can be observed – einstein

China inoculates itself against dollar collapse

Posted by ecoshift on March 17, 2009

This is worth a read. While there was much talk of decoupling at the beginning of the global crisis that thought, as CR, Setser and Roubini consistently pointed out, was so much wishful thinking. But, articles like the one below and the earlier post from the NYT indicate that decoupling may now begin in earnest. With little real evidence of a recovery in the real US economy, and the benefits of remaining tightly linked to US currency and US markets in decline, now is the time that holders of current account surpluses can take specific steps to reduce dependence on US markets and investments in US dollar denominated assets.

The dollar is starting to decline from recent highs. Articles such as the one below indicate the decline may be just beginning.

Asia Times Online :: China News, China Business News, Taiwan and Hong Kong News and Business.
China inoculates itself against dollar collapse
By W Joseph Stroupe

There is mounting evidence that China’s central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also mounting evidence that China’s increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China’s huge forex reserves, the exact degree of China’s exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China’s policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.


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