El dilema Chino del dólar

Financial Times: February 22 2009

La  flotación de Blackstone en junio del 2007 se ha vuelto uno de los eventos simbólicos  de la burbuja financiera de EEUU, el momento final de una era, el momento en el que los inversionistas más astutos decidieron retirarse.

Además el caso Blackstone también puede ser un punto de inflexión en otro capitulo de la crísis: el momento en el cual la China comenzó a preouparse realmente por sus posiciones en EEUU.

La China Investment Corporation (CIC), el fondo soberano de l país no había comenzado a operar formalmente cuando gastó USD 3000 millones the country’s sovereign wealth fund, had not even begun formally operating when it spent $3bn on a 9.9 per cent stake in the private equity group. With Blackstone’s shares down 84 per cent since flotation, CIC’s new executives have become the target of furious attacks by bloggers who think China was conned. “They are worse than wartime traitors,” says one recent chat-room posting. “Blind worship of the US by so-called ‘experts’,” complains another.

China’s near $2,000bn (£1,380bn, €1,560bn) in reserves, the world’s largest, are often viewed outside the country as a great strength – an insurance policy against economic turbulence. But within China, they are increasingly seen by the public and even some policymakers as something of an albatross – a huge pool of resources not being used at home that will plunge in value if the US dollar collapses. Why, people ask, should such a relatively poor country bankroll such a rich one?

Even at the elite level, the sense of frustration occasionally bubbles over. “We hate you guys,” Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), complained last week on a visit to New York. “Once you start issuing $1-$2 trillion … we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

As China’s economy slows sharply, the debate on how to manage its reserves is intensifying. Some propose spending the money at home; others want more diversification of investments. But the consensus behind recycling foreign currency into US government securities is coming under attack.

The discussion is hugely important for the Obama administration. At the very least, the Chinese government is likely to become much more forceful in trying to influence US economic policy. “There should be more give and take; some sort of guarantee that our interests will be defended,” says Yu Yongding, a leading economist at the Chinese Academy of Social Sciences. Given the vital role that China has played in financing US deficits, Washington “should at least be a little nicer”, he says.

The explosion in China’s foreign exchange reserves has been one of the more remarkable episodes in recent financial history. The official total is $1,950bn, but Brad Setser, of the Council on Foreign Relations, a New York-based think-tank, who tracks China’s foreign assets, puts the real figure at nearer $2,300bn – equivalent to more than $1,600 for every Chinese citizen.

From that total, Mr Setser calculates that about $1,700bn is invested in dollar assets, making the Chinese government by far the largest creditor of the US. Last year, when its economy was under extreme stress, China lent the US more than $400bn – equivalent to more than 10 per cent of Chinese gross domestic product. “Day after day, China is the single biggest buyer of Treasury bonds in the market,” he wrote in a recent report. “Never before has the US relied so heavily on another country’s government for financing.”

Within China, a popular backlash against the scale of these investments in the US has been building for some time. Founded in 2007, CIC controls assets equivalent to only about 10 per cent of the total reserves, yet it has become a lightning rod for criticism. Not only has its Blackstone investment gone sour, but CIC also invested $5bn in Morgan Stanley before the bank’s shares slumped. CIC also had money in Reserve Primary Fund, the US money market fund which froze redemptions after the collapse of Lehman Brothers.

A European banker who has been advising CIC on its overseas strategy says: “This is a completely unique situation for Chinese bureaucrats to face – having their every decision debated, analysed and often attacked in the media and on the internet. I get the feeling that they are all shell-shocked.”

Almost every week, a new proposal is launched to find a better way of investing the money. State media reported this week that a fund might be set up using reserves to back overseas investments by oil companies. Such ideas follow a flurry of recent natural-resources deals involving Chinese companies – most notably Chinalco’s planned investment in Rio Tinto – although none of these deals has directly involved foreign exchange reserves.

Another much-touted plan is for China’s finance ministry to “borrow” dollar reserves from the central bank, which would be swapped into local currency and spent on social projects.

Even the body that manages the bulk of the reserves, the State Administration of Foreign Exchange (Safe), admitted last week that it was debating new approaches. “We will actively expand channels and ways to use the foreign exchange reserves. In particular, we will explore how the reserves can better serve domestic economic development,” said Deng Xianhong, deputy director of Safe.

Yet officials recognise that there are still powerful reasons for China to keep buying Treasury bonds. If the authorities want to maintain most of their vast holdings in liquid assets, there are few options that match the depth of the US government bond market. And if China did not want to accumulate so many reserves, it would have to let its currency strengthen – exactly what the government does not want at a time when exports are crumbling.

China’s leaders have made it clear that, in the short-term at least, they will keep supporting US markets. They want to be thought of as responsible global citizens during the crisis. They also know that a strong signal that China was backing away from dollar investments would damage the value of the enormous holdings it already has.

“We believe that to maintain a stable international financial market is in the interests of shoring up market confidence … and facilitating early recovery of the international markets,” said Wen Jiabao, the Chinese premier, in a recent interview with the Financial Times, although he hinted at a shift in strategy when the crisis was over. As Arthur Kroeber, managing editor of the China Economic Quarterly, puts it: “China’s default policy is to pursue stability at all costs. They do not want to rock the boat when things are unstable.”

Yet if China has few options but to keep buying US Treasuries, it can still try to turn its investments into some sort of leverage. Think-tanks close to the government have been given the task of devising concessions that China can seek in recognition  of its bigger role in international economic affairs. Zha Xiaogang, of the Shanghai Institute for International Studies, has published an “economic wish-list”, which includes a relaxation of US restrictions on exports of sophisticated technology to China.

China economy

Chinese policymakers are also becoming increasingly critical of US financial policies. Last week’s barbed comments from Mr Luo of CBRC were the most colourful indication of Chinese fears of a dollar crisis (see above right). But there have been other hints from senior leaders. “We hope the US side will … guarantee the safety of China’s assets and investments in the US,” Wang Qishan, a vice-premier, told Hank Paulson when the former US Treasury secretary visited Beijing in December. Given public scepticism over the reserves, a tougher approach from Beijing would be well-received at home.

One of the ideas being discussed in Beijing is pushing for the International Monetary Fund to have greater authority to issue critical judgments about the health of the US economy and its financial system. Officials also hope to use purchases of US debt as a diplomatic weapon against protectionist measures in the US.

Arguably, China has already shown it can influence US decisions. One of the reasons the Bush administration was forced to recapitalise Fannie Mae and Freddie Mac last year, economists say, was because China had started to sell its bond holdings in the US agencies in favour of Treasuries. “China is beginning to behave like a normal creditor,” says Mr Setser.

Ultimately, China’s influence on US policy faces two big constraints. The dollar’s status as the world’s reserve currency gives the US huge flexibility that other countries with large deficits do not enjoy, much to the frustration of many Chinese officials. China’s unwillingness to let its currency appreciate more also limits its leverage.

But the political debate is likely to be very different. The Sino-US relationship used to involve lectures from Washington about China’s undervalued currency and its closed financial markets. Now they will include Chinese warnings on the risks of inflation in the US and dollar weakness. Fiscal conservatives in the US, worried about the country’s impending borrowing binge, have an unlikely new ally: Beijing.


The level of Chinese demand for US Treasury paper could play a crucial role in determining the interest rates the US government has to pay for its rapidly growing debt pile.

In the past year, Chinese investors – mainly its central bank – have become the biggest foreign holders of US Treasuries, increasing their holdings 15 per cent last year to nearly $700bn (€545bn, £485bn).

Foreign investors now own about $3,000bn of US Treasuries, or more than half of the amount publicly available. Whether Chinese buying continues to increase this year at the same pace could be an important factor in the outlook for the Treasury market.

In turn, the level of demand from China depends on the health of the US economy. The fewer Chinese goods Americans buy, the fewer dollars China will have to invest in dollar-denominated assets.

“China has become such an important player in US Treasury holdings that it will be critical to the direction of yields whether new money continues to be invested by China in US government debt,” says Alex Li, a strategist at Credit Suisse.

Chinese buying cannot be taken for granted. For example, in November, China sold $9.2bn of Treasury debt, the first month of net selling from the country since June 2008. By December, the last month for which data exist, China was a buyer again – highlighting the potential for swings.

Officially, China remains committed to the US Treasury market. But at a recent conference in New York, Luo Ping, a senior official of the China Banking Regulatory Commission (CBRC), expressed an ambivalence that is shared by senior officials from Saudi Arabia to Japan, also big buyers.

“US Treasuries are the safe haven; it is the only option,” said Mr Luo. “Once you start issuing $1-$2 trillion … we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Although these remarks were made with a smile, the CBRC quickly sent a note to the foreign press saying that China’s policies remained unchanged.

In addition, analysts are becoming conscious of growing opposition within China to the policy of investing so much wealth in low-yielding dollar assets.

“This is an area of criticism [China] will increasingly be sensitive to as it seeks to reduce its reliance on export-led growth,” said Chris Wood in his weekly publication for CLSA, the regional brokerage.

“It may all be a giant game of chicken. But it cannot be taken for granted that China will be willing to buy US paper for ever.”


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