See's view follows what Brad Sester said, the major risk in US investment is the exchange rate risk (i.e. potential USD depreciation in future). To mitigate such risk, China should lend money in RMB-denomiated bonds (to the US)
The implications are
- the interest rate is determined by RMB rate
- potential issue with China's forex control and also RMB market rate (increased demand by the time the RMB bonds are due -- but this could work in China's advantage, sort of, as it receives the appreciated notes, though the 'apparent downside' is the impact on export, but you can't have it both ways)
- this may help release the political pressure from US on the rate of RMB appreciation (vs USD) in future, as by then RMB appreciation will mean that the US government would have to pay more (the US government can always hedge the risk through forward contracts with the i-banks but there is small cost associated with such hedging. In fact, China can also do such hedging if it keeps on buying US Treasury bonds)
- if, by the time China's holding in RMB denomiated bonds reaches the size of USD (or EUR/etc) denominated bonds, the net impact of RMB appreciation (or depreciation for that matter) on China's reserve holding would be neutral. i.e. China does not need to hedge!
2 comments:
Sester's point surely is correct. But it's simply ignorant for See to sugges China lends RMB to America. The current situation is that China holds too much US dollars, and China's government doesn't have enough RMB so that it has to run huge deficies this year. The reason that China is lending huge amount of money to USA is that China keeps on accumulating foreign reserves. As long as China's foreign reserves increase, China has to invest those reserves somewhere, and the best place to invest is still the America.
@草示儿，
yes, it is more complicated than that. as you said.
the problem china is facing is that, anticipating the fall in USD (now more evident after Bernake's decision), China can either invest the forex in USD or other currencies such as EUR (which apparently has a tighter monetary policy -- at this moment at least). but china seems to be obliged to increase its USD holding due to US request (and also to support china's own export industry).
since there is demand from USD for cash, what china could do is to lend its forex with different terms (eg RMB or EUR denominated, instead of simply US treasury). china still deposits USD in foreign banks/agency, but let others (lenders or banks) take the forex risk.
this will be more complicated to structure and would not have been possible a couple years ago. but at today's market environment, where US needs the cash, China just might be able to shift part of its reserve/investment in this direction , gradually.
the target is not to reduce China's total USD exposure, but to slow down ths increase in absolute amount, and decrease the % as a total through 'dilution'.
Post a Comment