Sunday, August 2, 2009

China's Dollar Problem

. Sunday, August 2, 2009

Jean Paul Getty famously said "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." Such is the position in which China finds itself:

Indeed, China has little incentive to talk down the dollar and such calls are regarded as little more than pleas to the US authorities to keep their finances in check.

Simon Derrick, at Bank of New York Mellon, says China is not in a position to sell a significant portion of its dollar holdings in the open market without causing considerable damage to itself. This means that it must explore a number of different short- and long-term strategies to deal with the problem.

“Developments this year indicate that China now believes that its best long-term strategy is to increase the international role of the renminbi, including its use as a reserve currency,” he says. “This might be the first signal that China is now considering a potential timetable, presumably over years rather than months, for moving towards capital account convertibility.”

Capital account convertibility will not happen in the immediate future, but eventually China will have to go there. The question is what they can, or should, do in the meantime. If they slow the export boom they will be forcing millions into unemployment. A model of economic growth based on boosting domestic consumption cannot grow 10% per year, and the process of structural adjustment will have destabilizing effects in the economy. And of course, any destabilization of the economy could destabilize the Chinese regime.

They can't let that happen. So in the short run, at least, the U.S. debt held by China will remain China's problem.


China's Dollar Problem




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