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29-08-2013, 10:17 AM
"Chimerica", a new term on China-US relationship. New to me, and learn new thing today.
This article worth a read, and re-read from time to time. Sharing it with buddies here...
China could get an American bailout
The 21st-century economy has thus far been shaped by capital flows from China to the United States — a pattern that has suppressed global interest rates, helped to reflate the developed world’s leverage bubble and, through its impact on the currency market, fuelled the former’s meteoric rise.
But these were no ordinary capital flows. Rather than being driven by direct or portfolio investment, they came primarily from the People’s Bank of China as it amassed US$3.5 trillion (S$4.5 trillion) in foreign reserves — largely US Treasury securities.
The fact that a single institution wields so much influence over global macroeconomic trends has caused considerable anxiety, with doomsayers predicting that doubts about US debt sustainability will force China to sell off its holdings of US debt. This would drive up interest rates in the US and, ultimately, could trigger the dollar’s collapse.
But selling off US Treasury securities, it was argued, was not in China’s interest, given that it would drive up the yuan’s exchange rate against the dollar, diminishing the domestic value of the country’s reserves and undermining the export sector’s competitiveness.
Indeed, a US Defence Department report last year on the national security implications of China’s holdings of US debt concluded that “attempting to use US Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the (US)”.
MASSIVE, TERRIFYING DISTORTIONS
To describe the symbiotic relationship between China’s export-led gross domestic product growth (GDP) and America’s excessive consumption, the economic historians Niall Ferguson and Moritz Schularick coined the term Chimerica.
The invocation of the chimera of Greek mythology — a monstrous, fire-breathing amalgam of lion, goat, and dragon — makes the term all the more appropriate, given that Chimerica has generated massive and terrifying distortions in the global economy that cannot be corrected without serious consequences.
In 2009, these distortions led Mr Ferguson and Mr Schularick to forecast Chimerica’s collapse — a prediction that seems to be coming true. With the reserves’ long-term effects on China’s internal economic dynamics finally taking hold, selling off foreign-exchange reserves is now in China’s interest.
Over the last decade, the vast quantities of short-term capital that were being pumped into the country’s banking system drove commercial banks and other financial institutions to expand credit substantially, especially through the shadow-banking system, leading to a massive credit bubble and severe over-investment.
In order to manage the resulting increase in risk, China’s new leaders are now refusing to provide further liquidity injections, as well as curbing loans to unprofitable sectors.
But these efforts could trigger a financial crisis — requiring China to initiate a major recapitalisation of the banking system. In such a scenario, non-performing loans in its banking system would probably amount to roughly US$1 trillion.
The most obvious means of recapitalising the country’s banks would be to inject yuan-denominated government debt into the banking sector. But its total public debt, including off-balance-sheet local-government financing vehicles, probably amounts to around 70 per cent of GDP already.
Despite debate over the details, the conclusion of Ms Carmen Reinhart and Mr Kenneth Rogoff — that a high debt/GDP ratio can inhibit economic growth — remains widely accepted; so it is unlikely that raising the debt ratio to 100 per cent would be in China’s long-term interest.
Even if its leaders decided that they had the necessary fiscal latitude to pursue such a strategy, they probably would not, owing to the risk of inflation, which, perhaps more than any other economic variable, tends to lead to social unrest.
SELL-OFF IS MOST LIKELY
Given this, in the event of a crisis, China would most likely have to begin selling off its massive store of US debt. Fortunately for it, the negative consequences of such a move would probably be far less severe than previously thought.
To be sure, an injection of US Treasuries into the banking sector, and their subsequent conversion to yuan, would still strengthen China’s currency. But the rise would most likely be offset by capital outflows, as looser capital controls would enable savers to escape the financial crisis.
Moreover, even if the yuan became stronger in the short term, China is no longer as dependent on maintaining export competitiveness as it once was, given that, excluding assembly and reprocessing, exports now contribute less than 5 per cent of China’s GDP.
Against this background, the US Federal Reserve, rather than focusing only on “tapering” its monthly purchases of long-term securities (quantitative easing), must prepare itself for a potential sell-off of US debt. Given that a Fed-funded recapitalisation of China’s banking system would negate the impact of monetary policy at home, driving up borrowing costs and impeding GDP growth, the Fed should be ready to sustain quantitative easing in the event of a Chinese financial crisis.
After spending years attempting to insulate the US economy from the upshot of its own banking crisis, the Fed may ultimately be forced to bail out China’s banks, too. This would fundamentally redefine — and, one hopes, rebalance — US-China relations. PROJECT SYNDICATE
ABOUT THE AUTHOR:
Alexander Friedman is Global Chief Investment Officer for UBS Wealth Management.
http://www.todayonline.com/chinaindia/ch...an-bailout
This article worth a read, and re-read from time to time. Sharing it with buddies here...
China could get an American bailout
The 21st-century economy has thus far been shaped by capital flows from China to the United States — a pattern that has suppressed global interest rates, helped to reflate the developed world’s leverage bubble and, through its impact on the currency market, fuelled the former’s meteoric rise.
But these were no ordinary capital flows. Rather than being driven by direct or portfolio investment, they came primarily from the People’s Bank of China as it amassed US$3.5 trillion (S$4.5 trillion) in foreign reserves — largely US Treasury securities.
The fact that a single institution wields so much influence over global macroeconomic trends has caused considerable anxiety, with doomsayers predicting that doubts about US debt sustainability will force China to sell off its holdings of US debt. This would drive up interest rates in the US and, ultimately, could trigger the dollar’s collapse.
But selling off US Treasury securities, it was argued, was not in China’s interest, given that it would drive up the yuan’s exchange rate against the dollar, diminishing the domestic value of the country’s reserves and undermining the export sector’s competitiveness.
Indeed, a US Defence Department report last year on the national security implications of China’s holdings of US debt concluded that “attempting to use US Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the (US)”.
MASSIVE, TERRIFYING DISTORTIONS
To describe the symbiotic relationship between China’s export-led gross domestic product growth (GDP) and America’s excessive consumption, the economic historians Niall Ferguson and Moritz Schularick coined the term Chimerica.
The invocation of the chimera of Greek mythology — a monstrous, fire-breathing amalgam of lion, goat, and dragon — makes the term all the more appropriate, given that Chimerica has generated massive and terrifying distortions in the global economy that cannot be corrected without serious consequences.
In 2009, these distortions led Mr Ferguson and Mr Schularick to forecast Chimerica’s collapse — a prediction that seems to be coming true. With the reserves’ long-term effects on China’s internal economic dynamics finally taking hold, selling off foreign-exchange reserves is now in China’s interest.
Over the last decade, the vast quantities of short-term capital that were being pumped into the country’s banking system drove commercial banks and other financial institutions to expand credit substantially, especially through the shadow-banking system, leading to a massive credit bubble and severe over-investment.
In order to manage the resulting increase in risk, China’s new leaders are now refusing to provide further liquidity injections, as well as curbing loans to unprofitable sectors.
But these efforts could trigger a financial crisis — requiring China to initiate a major recapitalisation of the banking system. In such a scenario, non-performing loans in its banking system would probably amount to roughly US$1 trillion.
The most obvious means of recapitalising the country’s banks would be to inject yuan-denominated government debt into the banking sector. But its total public debt, including off-balance-sheet local-government financing vehicles, probably amounts to around 70 per cent of GDP already.
Despite debate over the details, the conclusion of Ms Carmen Reinhart and Mr Kenneth Rogoff — that a high debt/GDP ratio can inhibit economic growth — remains widely accepted; so it is unlikely that raising the debt ratio to 100 per cent would be in China’s long-term interest.
Even if its leaders decided that they had the necessary fiscal latitude to pursue such a strategy, they probably would not, owing to the risk of inflation, which, perhaps more than any other economic variable, tends to lead to social unrest.
SELL-OFF IS MOST LIKELY
Given this, in the event of a crisis, China would most likely have to begin selling off its massive store of US debt. Fortunately for it, the negative consequences of such a move would probably be far less severe than previously thought.
To be sure, an injection of US Treasuries into the banking sector, and their subsequent conversion to yuan, would still strengthen China’s currency. But the rise would most likely be offset by capital outflows, as looser capital controls would enable savers to escape the financial crisis.
Moreover, even if the yuan became stronger in the short term, China is no longer as dependent on maintaining export competitiveness as it once was, given that, excluding assembly and reprocessing, exports now contribute less than 5 per cent of China’s GDP.
Against this background, the US Federal Reserve, rather than focusing only on “tapering” its monthly purchases of long-term securities (quantitative easing), must prepare itself for a potential sell-off of US debt. Given that a Fed-funded recapitalisation of China’s banking system would negate the impact of monetary policy at home, driving up borrowing costs and impeding GDP growth, the Fed should be ready to sustain quantitative easing in the event of a Chinese financial crisis.
After spending years attempting to insulate the US economy from the upshot of its own banking crisis, the Fed may ultimately be forced to bail out China’s banks, too. This would fundamentally redefine — and, one hopes, rebalance — US-China relations. PROJECT SYNDICATE
ABOUT THE AUTHOR:
Alexander Friedman is Global Chief Investment Officer for UBS Wealth Management.
http://www.todayonline.com/chinaindia/ch...an-bailout
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