Here is some interesting commentary from last week's Barron's (subscription required):
In a replay of tariffs slapped on steel imports in 2002, the Commerce Department said it would impose tariffs of 10.9% to 20.4% on Chinese coated papers in retaliation for subsidies Beijing provides. The dollar reacted negatively to the protectionist measure, which recalls the currency's drop in the wake of the steel tariffs. Although later reversed by the World Trade Organization, those levies helped set off a 35% decline in the dollar against the euro in the following year, writes Ashraf Laidi, CMC Markets' chief foreign-exchange analyst.
Whether or not these new tariffs also are reversed by the WTO, the U.S. actions could trigger retaliation by China, notably further diversification of its currency reserves, the vast majority of which are held in dollars in the form of U.S. bonds. As noted here several weeks ago, one academic study estimated that foreign-capital inflows have lowered long-term U.S. interest rates by 90 basis points (0.9%). All else being equal, less buying of U.S. assets would tend to boost yields.
These higher rates would pile onto the already staggering housing market. Higher inflation resulting from the tariffs and the weaker dollar would add to pressure on the Federal Reserve not to lower rates to offset the effect of a housing slide on the economy, according to T.J. Marta, fixed-income strategist for RBC Capital Markets.
China and the US are in a mutually beneficial relationship; we buy their products, they loan us money.
In addition, China and the US are involved in a currency version of Mutual Assured Destruction. While I have expressed concern about the US/China relationship many times -- and am still concerned -- a move by the Chinese to dump dollars would devalue about $1 trillion in assets held by the central Chinese Bank. In short -- it would hurt them as well.
That does not mean we should not be concerned about China's international reserves. the trade deficit is indicative of a massively imbalanced international trading system. However, calls for monetary collapse based in this situation aren't 100% on the money.
1 comment:
You are assuming China would use a 2x4 when a needle would do. China doesn't have to move away from the US dollar in a big, permanent way to show displeasure with this or any other US move. It can simply not by treasuries for a couple of months until the US got the point. Once the long bond moved over, say 5.3%, there would be some quiet diplomacy and, lo and behold, the US policy would change, treasuries would be bought, the long term yield would move back under 5%, and the stupid gweilo barbarians would go back to sleep.
Much more like China is a slow, surreptitious diversification with lots of misdirection. The Chinese government announced its policy of diversification a couple of years ago. So, who can tell me what other currencies are in the basket of currencies China uses to value its Yuan? What percentages of each currency is used? Have they actually followed their announced policy?
You say you don't know? Welcome to the bureaucratic Chinese mind, stupid barbarian.
The important point in the Barron's piece to me was that, for the first time, the US is being told to constrain its policy choices because its Chinese banker might disapprove. Welcome to 3rd world status.
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