China announced last week that its State Administration of Foreign Exchange would remove the $1bn limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the Qualified Institutional Investor Programme (QFII).
David referenced that this might turn out to be pretty significant as reserve managers are currently desperate to diversify their holdings out of euro and dollar.
But there’s another important factor to consider too. China is not a benevolent agent which just does things for the sake of pleasing other people. If it chooses to act you can bet your bottom yuan that it’s because it suits its own interests to do so. Read more
Nomura’s Richard Koo has written a fascinating account of his meeting with “a number of influential politicians, academics, and senior government officials” in Berlin last week.
First, he heard that some Germans don’t think Greece should have ever been admitted to the eurozone. One of them even said Greece was not really a modern nation-state, Koo writes. Another politician/academic/official was more positive, saying both Greece and Ireland had become more competitive of late, as wages and prices had fallen. Read more
So, about the inflation-led solution to eurozone imbalances that Germany has apparently signed up for…
From Der Spiegel (with our emphasis): Read more
Don’t laugh. European politicians mean it this time. True, the Stability and Growth Pact turned out to be a bit useless and toothless. The lessons of the past have been learned and now there are newer, shinier, summarisier statistics on macroeconomically imbalanced countries within the European Union. As agreed by the European Parliament and Council last November, there’s also a new procedure that comes with the statistics. The aim is to catch nations before they get too far off the path of
righteousness being more like Germany economic harmony.
The first slew of statistics under the procedure, or “Alert Mechanism Report” (AMR), was released in the middle of February. Read more
Remember how this eurozone mess largely boils down to a balance of payments problem? The peripherals have current account deficits and the northern countries have surpluses. As the eurozone is a semi-closed/unified economy, it is difficult for the peripherals to pull out of that situation while the northern countries remain determined to be in surplus.
A paper from Deutsche Bank’s Gilles Moec points out some contradictions in this argument — but ultimately, we think, validates it. Read more
Presenting, one of the best accounts of how the current crisis came about that we’ve read to date.
It comes courtesy of Benoît Cœuré, member of the executive board of the ECB, and should be required reading for every player in financial markets, if not every technocrat the world over. Read more
This will sound familiar.
The problem: FX-reserves-hoarding countries, often collectively referred to as “China” (though there are plenty others), bought USDs either to artificially hold down their currencies and boost exports or to defend against the kinds of outflow-driven busts that were prevalent in the late 1990s. They invested said USDs in US treasuries and agencies, which held down real interest rates in the US, which then led to the property BOOM. Read more
UBS senior economic adviser George Magnus addresses the issue of Washington’s budgetary crisis on Monday.
As he points out, to some there is a major fiscal imbalance that has to be addressed, but no crisis — while to others the US is bust and nothing short of an immediate downsizing will neutralise a looming austerity crisis. Read more
From BNP Paribas’ FX team on Thursday — an update on Europe’s current account:
Nomura’s Richard Koo — he of ‘balance sheet recession’ fame — has been inspired.
He’s spent a week with Chi Hung Kwan, of the Nomura Institute of Capital Markets Research and an all-around China expert, and come back with the discovery that the “conventional wisdom on [the] Chinese economy has begun to collapse.” Read more
China recorded its smallest trade surplus in nine months in December as export growth slowed and imports to feed the booming domestic economy surged ahead, reports the FT. The country’s trade surplus in December was $13.1bn, well below economists’ predictions and November’s $22.9bn surplus, according to Chinese customs data. The shrinking surplus is partly explained by higher prices of the commodities and raw materials China imports to power its growth.
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. …
One of the reasons why Beijing has tended to stockpile US Treasuries is connected to the need to absorb surpluses generated via the US trade deficit with China.
China’s dollar peg largely depends on the process. Read more
Goldman Sachs does it better than the ECB . . . or the rating agencies, says FT Alphaville. Late on Tuesday, the investment bank published a proposal for the European Central Bank’s future role in shaping eurozone policy. The suggestion: a simple system of graduated haircuts on sovereign securities — based on the size of emerging imbalances — that would provide warning signals for markets. In fact, Goldman’s Erik Nielsen (long a fan of sliding haircuts) and Alexandre Kohlhas, argue such a system would probably have helped avert the recent eurozone crisis. Read more
FT Alphaville features a paper by Reza Moghadam, director of the IMF’s strategy, policy and review department, which discusses how the organization sees the International Monetary System evolving after the financial crisis. Notably, according to the paper, the best way to ensure the stability of the international monetary system (post crisis) is actually by launching a global currency. Read more
Distortions in the global economy that provided the backdrop to the financial crisis threaten to widen again and upset the worldwide recovery, the European Central Bank has warned, according to the FT. In unusually blunt language, the ECB has made clear its fear that governments are not doing enough to put the global economy back on a sustainable growth path – despite international policy initiatives in the past year.
FT Alphaville looks at the temporary nature (or otherwise) of the Chinese trade deficit. Read more