China, the US and the dollar – July 17

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How long will China finance America?
Robert Peston, BBC Online
China’s foreign exchange reserves have soared.

In the second quarter of the current year, they rose by $178bn to $2.132 trillion to exceed $2 trillion for the first time.

According to Bloomberg this is a record increase.

On this occasion, the primary cause is not the great surplus of China’s exports over its imports.

It’s the result of overseas investors identifying China as the strongest of the world’s major economies and pouring money into property and into shares: the Shanghai Composite Index has jumped 74% this year…
(15 July 2009)

Geithner-Dollar to remain world’s key reserve currency
Glenn Somerville, Reuters
U.S. Treasury Secretary Timothy Geithner said he was reassured during a visit to the Gulf that the U.S. dollar will remain the region’s main reserve currency and said he wanted to find ways to reduce oil price volatility.

Interviewed on Al Arabiya television on Wednesday near the end of a two-day swing through Saudi Arabia and the United Arab Emirates, Geithner also renewed a pledge to back a strong dollar in an apparent bid to calm Mideast investor worries.

“It is the policy of the United States and it will remain the policy of the United States to remain committed to a strong dollar,” he said, adding he had heard no concern about the dollar’s status in talks with Gulf business and government leaders…
(15 July 2009)

Yuan small step
The Economist
THE Chinese used to call dollars mei jin, which means “American gold”. Buying black-market dollars was considered the safest way to protect one’s savings. Yet in June when Tim Geithner, America’s treasury secretary, told students at Peking University that China’s official holdings of Treasury bonds were safe, the audience laughed. Faith in the greenback is waning.

In the build-up to the annual summit of G8 countries, which began on July 8th in the Italian city of L’Aquila, officials in China, Russia and India all called for an end to the dollar’s dominance in the international monetary system. Dmitry Medvedev, Russia’s president, declared on July 5th that the dollar system is “flawed”; his central bank has been reducing its dollar holdings. The People’s Bank of China (PBOC), China’s central bank, repeated its call for a new global reserve currency in June and is now taking the first steps towards turning the yuan into a global currency.

Beijing is particularly influential in this debate. The dollar accounts for 65% of the world’s foreign-exchange reserves (see chart), only slightly less than a decade ago and well ahead of the euro’s 26% share. Three-quarters of all reserves are in the hands of emerging economies; China alone holds one-third of the global stash…
(12 July 2009)

History suggests it could be decades before the dollar is dislodged
Roger Bootle, The Daily Telegraph
It is not inevitable that a single national currency should dominate as the dollar has. Before 1970, for example, countries held a large share of their reserves in gold. Alternatively, countries could spread their reserves more evenly across a number of currencies, so that the value of the total is insulated from the impact of exchange rate moves.

The Chinese are worried that, by accident or design, the dollar could collapse, taking the value of China’s reserves with it. China’s central bank governor has gone so far as to suggest that the dollar’s role as a reserve currency helped to bring about the current financial crisis by forcing countries with growing reserves to channel them into the US markets, where they provided the finance for the bubble, with ultimately catastrophic results…
(12 July 2009)