1. It isn't China that is proposing to cut its foreign reserves. It's the Chairman of the "China Everbright Group" (whatever that is), and the governor of the central bank of China. What he says isn't necessarily China's policy because historically there has been tension between the central banker, which wants to use monetary policy to manage China's economy but has his hands tied because of the influence of the exporters who want to keep the Yuan closely pegged to the Dollar.
2. China doesn't just hold $3T in USD holdings. No, it has $3T in foreign reserves, which isn't all USD holdings.
China's actual policy may be completely different from what the governor of the central bank has wanted for many years.
First of all, the headline is wrong. "China" has proposed no such thing as that. One private Chinese banker has proposed it.
China selling all its dollars at once would depress the dollar significantly. That’s why China won’t do any such thing. It would be pointlessly wasteful to set their own money on fire. Storing $3 trillion IOUs in a vault is already a terrible way to use money. It would be better for that money to be in the Chinese economy.
If China starts spending more of its trade surplus on helping people at home instead of stockpiling useless green pieces of paper, all the better. This will have an expansionary effect on the United States, since that’s where the dollars will eventually be spent, and they’re not doing anyone any good being frozen in China’s vault.
What the lede of the article actually said: "China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday."
What the headline of the article actually was: "China should cap forex reserves at 1.3 trillion U.S. dollars: China banker"
What the HN guidelines say about changing article titles: "You can make up a new title if you want, but if you put gratuitous editorial spin on it, the editors may rewrite it."
China would love to be less exposed to the dollar. Unfortunately they buy USD mainly to hold down the yuan. Selling USD would mean the yuan would appreciate, reducing their competitive advantage and harming exports.
"China's USD reserves are a function of their trade surplus with the USA. If they don't want to accumulate USD then they should allow their currency to rise and start consuming more goods domestically while producing fewer goods for the USA. But they don't want to do that because they have a growth target to meet and their export growth to the USA plays a large role in that target. So, their accumulation of reserves and US tsys is a function of their desire to export goods and services to the USA. If they want lower growth then they can stop accumulating USD's. But that isn't going to happen unless they find growth elsewhere...Being the largest economy in the world means they will remain a huge exporter to the USA."
Any economists out there who can explain what this would mean? I imagine that China selling 2/3 of their USD reserves would devalue the dollar pretty significantly.
Comments
The title is misleading in multiple ways:
1. It isn't China that is proposing to cut its foreign reserves. It's the Chairman of the "China Everbright Group" (whatever that is), and the governor of the central bank of China. What he says isn't necessarily China's policy because historically there has been tension between the central banker, which wants to use monetary policy to manage China's economy but has his hands tied because of the influence of the exporters who want to keep the Yuan closely pegged to the Dollar.
2. China doesn't just hold $3T in USD holdings. No, it has $3T in foreign reserves, which isn't all USD holdings.
China's actual policy may be completely different from what the governor of the central bank has wanted for many years.
First of all, the headline is wrong. "China" has proposed no such thing as that. One private Chinese banker has proposed it.
China selling all its dollars at once would depress the dollar significantly. That’s why China won’t do any such thing. It would be pointlessly wasteful to set their own money on fire. Storing $3 trillion IOUs in a vault is already a terrible way to use money. It would be better for that money to be in the Chinese economy.
If China starts spending more of its trade surplus on helping people at home instead of stockpiling useless green pieces of paper, all the better. This will have an expansionary effect on the United States, since that’s where the dollars will eventually be spent, and they’re not doing anyone any good being frozen in China’s vault.
What the lede of the article actually said: "China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday."
What the headline of the article actually was: "China should cap forex reserves at 1.3 trillion U.S. dollars: China banker"
What the HN guidelines say about changing article titles: "You can make up a new title if you want, but if you put gratuitous editorial spin on it, the editors may rewrite it."
China would love to be less exposed to the dollar. Unfortunately they buy USD mainly to hold down the yuan. Selling USD would mean the yuan would appreciate, reducing their competitive advantage and harming exports.
I asked Cullen Roche (http://pragcap.com/), and this is what he said:
"China's USD reserves are a function of their trade surplus with the USA. If they don't want to accumulate USD then they should allow their currency to rise and start consuming more goods domestically while producing fewer goods for the USA. But they don't want to do that because they have a growth target to meet and their export growth to the USA plays a large role in that target. So, their accumulation of reserves and US tsys is a function of their desire to export goods and services to the USA. If they want lower growth then they can stop accumulating USD's. But that isn't going to happen unless they find growth elsewhere...Being the largest economy in the world means they will remain a huge exporter to the USA."
Could this be why the Pentagon has recently recommended to cut its own budget? -- http://news.ycombinator.com/item?id=2478908
Any economists out there who can explain what this would mean? I imagine that China selling 2/3 of their USD reserves would devalue the dollar pretty significantly.