Beijing signs 70 billion yuan swap deal with Argentina

Reuters in Beijing
1:27pm, Mar 30, 2009 China and Argentina have agreed a 70 billion yuan (HK$79.54 billion) currency swap so the Latin American country can pay for mainland imports in yuan, the official Xinhua news agency said on Monday....

Beijing unveils 100 billion yuan currency swap with Indonesia

Reuters in Beijing
2:10pm, Mar 23, 2009 Mainland’s central bank on Monday announced a three-year currency swap with Indonesia worth nearly US$15 billion, its latest effort to use its massive foreign exchange reserves to promote financial stability in Asia...

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G20 a tripolar economic game of chess

By Zhang Ming (China Daily)
Updated: 2009-03-30 07:53

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At the G20 summit in London this week, the world's leading powers will face off on core political and economic interests in the midst of a global financial crisis. The United States, the Eurozone countries and emerging economies will be negotiating such issues as sharing bailout costs, stimulating economic growth and revamping the international monetary system. That will help accelerate the formation of a tripolar international monetary system, but like the previous summit in Washington, we may not see substantive results.

For

Since the subprime crisis broke out in the US, Washington has made every attempt to bail out its economy. The White House has launched a series of bailout measures, but those expansionary fiscal and monetary policies are not enough to stabilize the country's financial market and economy.

The US also has to think about where the bailout money will come from.

The Obama administration has been trying to do this since January and will continue to promote the bonds at the London summit. Although issuing more Treasury bonds will have less of a negative impact than printing more greenbacks, the US government has to persuade its major creditors, including China, Japan, Britain and Middle East countries, to buy more of its Treasuries.

As a result, emerging economies that hold large foreign exchange reserves, such as China, are concerned about the ability of the US to back up the value of its dollar assets. They are demanding that as a precondition for purchasing more of the bonds the US take inflation into consideration.

Countries in the Eurozone regard the ongoing world financial crisis as an opportunity to challenge the US core position in the international monetary system. France and Germany in particular, are looking to strengthen the position of the euro and weaken the dominance of the dollar in reshaping the international monetary system.

The author is a researcher with the Chinese Academy of Social Sciences

By Pan Chengfu (China Daily)
Updated: 2009-03-30 07:53

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The US Federal Reserve announced on March 18 that it would buy up to $300 billion worth of long-term Treasury bonds in the next six months. It would also spend an extra $750 billion this year - in addition to the originally planned $500 billion - in mortgage-backed securities (MBS).

This announcement has caused quite a stir in China, which holds more than $1 trillion in foreign exchange reserves. Some Chinese media have called it "the most shameless bailout measure" and "a blow to China's foreign exchange reserves" in their reports. The Internet has been flooded with angry reactions with some people advocating that China stock up on gold.

Those remarks are short of both reasoning and common sense.

The Fed has been running its printing presses for quite some time. In January, the Fed shifted its monetary policy toward quantitative easing, which means printing new money to buy government and corporate debt. It planned to buy $500 billion in MBS, including those issued by Fannie Mae and Freddie Mac, over the next six months.

In addition, it is not an unusual measure for the Fed to buy Treasuries on the open market. It does not buy them "directly" from the Treasury Department. The difference this time, however, is that the Fed buys long-term, instead of short-term Treasuries. No matter what assets the Fed buys, be it Treasury, MBS or even gold, the effect on the economy will be the same.

On the other hand, the value of China's foreign exchange reserves depends on the criteria used in evaluation.

If judged only on book value, the value of other currencies in our reserves will increase in dollar terms, because the Fed purchase of US government bonds helps depreciate the dollar. Also, the prices of Treasuries will rise with the Fed move, leading to an increase in the book value of the bonds that China holds.

In euro terms, the value of China's foreign exchange reserves would shrink. Therefore, exchange rate fluctuations only result in changes in the book value and that should not worry us too much.

What poses a real threat to China's foreign exchange reserves is the rise in commodities prices on the international market, such as crude prices rising to $140 a barrel and the prices of grain and iron ore soaring to shocking highs last year. Of course, the Fed buying of US Treasuries will help buoy the prices of commodities. We do not have to fear the price rise in commodities, for it is a must for the global economy to recover from the ongoing crisis. Otherwise, an economic rebound would be impossible.

Now that the dollar has become weaker, the yuan might well have followed it to depreciate. It would help China's exports or at least keep its current export market share.

Finally, let us go back to the Fed. Does the Fed intend to discharge its debts by printing more greenbacks? Since such a measure would not differentiate Americans from foreign creditors, I do not think the Fed is crazy enough to do that, for it would do no good to the US economy, either.

The Chinese and US economies have been intertwined for a long time. The risks faced by China in its foreign exchange reserves have built up over a long period of unbalanced growth in both economies rather than from the Fed now buying Treasuries.

What should worry us the most is that the Fed might be unable to curb inflation. How to recycle the huge amount of money injected into the market when the economy recovers is a thorny issue. The worst-case scenario is that hyperinflation could hit well before the economy has fully recovered.

The author is an associate professor with Guangdong University of Business Studies. The article was reprinted from Shanghai Securities News

By Xin Zhiming (China Daily)
Updated: 2009-03-30 07:43

"China would not be confrontational even if it has differences with such powers as the US," she said. "If other countries follow Norway's suit, China will definitely play its part in contributing to the fund."

But the fund must adopt sweeping reforms so that the voices of developing countries are well heard, said Xiang Songzuo, chief economist of the Global Business and Finance Institute.

In the current IMF voting framework, the EU has 32 percent and the US, 17 percent; compared with China's 3.7 percent and India's 1.9 percent. Major decision making at the agency requires at least 85 percent of the overall vote and, therefore, the US has a de-facto veto.

"There are no signs that the US would give up its veto, but the IMF would have to reform the voting regime if it wants to win back lost confidence," he said.

Norway's move may lead to more contributions from other countries, but the IMF still faces huge challenges in meeting its target of re-financing, said Dong Yuping, economist with the Institute of Finance and Banking of the Chinese Academy of Social Sciences.