Brad Setser wrote about it last Friday. This morning the Wall Street Journal's Andrew Browne takes a turn (page A1 of the print edition):
Sometime in the next few days, China's holdings of foreign currencies and securities will top $1 trillion -- a sum greater than the annual economic output of all but nine countries. The rapid growth in these so-called foreign-exchange reserves has made Beijing a colossus in the financial world, cushioned against shocks at home, but potentially able to trigger them abroad.
How China manages its growing pool of wealth has major repercussions for the global economy. Beijing's reserves totaled $987.9 billion as of Sept. 30 and are growing by roughly $20 billion a month. That total compares with the about $1.2 trillion in assets under management at U.S. mutual-fund giant Fidelity Investments.
Want details? Turn to Brad:
China discloses almost nothing about its reserves, beyond their awesome size. Roughly 70% of the Chinese reserves are believed to be in U.S. dollar assets, 20% in euros and 10% in other currencies, including the Japanese yen and Korean won, according to Brad Setser, an economist at Roubini Global Economics.
That last fact probably has a lot to do with another puzzle Brad highlighted last week:
The dollar has been rather strong relative to the yen for some time now. And it is currently getting even stronger.
The dollar was weak against the euro at 1.28 – and at say 1.25, it is still pretty weak. Ask Airbus, which sells planes for dollars and buys parts in euros. But right now the dollar is also rallying against the euro.
And my friends at Danske “Geyser Crisis” Bank think the dollar could reach 1.16 or so. Ok, 1.16 is just their headline -- but they are looking for 1.20.
What will change any time soon? Back to the WSJ:
The country's massive foreign-exchange reserves are a direct result of China's effort to manage the exchange rate of its currency. To prevent the value of the yuan from strengthening too rapidly and hurting China's exports, the country's central bank buys dollars from foreign investors and China's own exporters, issuing yuan in exchange.
As of yesterday, the People's Bank of China is sticking to a no rush attitude. From Forbes:
China's yuan will rise gradually to counter long-term appreciation pressure, People's Bank of China assistant governor Yi Gang said.
The official Xinhua news agency quotedd Yi as saying that the current managed floating exchange rate was a success and had helped to mitigate concerns about the impact of a stronger currency on the nation's exporters.
'The yuan exchange rate will remain basically stable at a reasonable and balanced level, with a gradual yuan rise to counter long-term appreciation pressure,' he said in a recent speech in Beijing.
And, again from the Journal article, there is this:
By spending a large chunk of its national savings to buy U.S. debt, China is helping keep mortgage rates in the U.S. low at a time when the money could be put to use in its own huge, developing economy. The Chinese health system is collapsing; schools are starved of funds; social welfare systems are in dire need of cash.
There's the rub. Apparently collapsing health care systems, starving schools, and failing social welfare systems are not inducing much confidence that national saving is best allocated to internal needs in China. The tipping point may very well come when those pressures to shore up the social infrastructure become overwhelming. But until then, that national saving has to go somewhere, and the fact is it continues to be dollars. So far, the Chinese seem disinclined to change that pattern:
Just this month, comments by an adviser to the central bank that it was risky for China to hold so many dollars sent the dollar slipping from multimonth highs against major currencies. But Fan Gang, a member of the central bank's monetary policy committee, speaking at a financial forum, was quoted by Reuters news service as saying that China had few alternatives to dollar investments.
I've agreed with those who have said an adjustment will some day come, but have disagreed with the sentiment that it will come fast. I'm still looking for evidence that it is likely to be otherwise.
UPDATE: Brad has more.