Fascinating post from Brad Setser detailing China's holdings of USD holdings.
Therein, he describes the dilemma facing China: On the one hand, it wants the US to demonstrate fiscal restraint to protect the value of its USD holdings. But, China also wants a large and vigorous government stimulus package to keep exports humming along.
One dimension that isn't addressed in Brad's post is how (Chinese) politics affect how this dilemma gets resolved.
In my view, the political calculations made by China's leadership should make export growth the preferred option. Exports will bolster employment both directly and through continued attraction of foreign direct investment. This, of course, promotes social stability and keeping the party in power.
While any losses in Chinese USD holdings will likely provoke a firestorm of criticism, this will likely be contained and less likely to up-end the CCP apple cart than the former outcome. Also, losses due to debt monetization may not be as great as when the value of China's holdings are viewed in term of purchasing power parity.
This suggests that the US will, of course, offer the requisite genuflecting to China's concerns. But, from a practical perspective, it isn't in the political interest of China to take any serious action to deter the US from any fiscal actions that threaten the value of its USD holdings.
3 comments:
Hmmm... Not entirely sure about that. If there is one thing the Chinese are sensitive to it's losing money, and ever since they lost on their Blackstone investment, the govt, has been hypersensitive to announcing their losses which are now even larger, without any doubt. It's just that they are not announced. And for good reason. Mark to market accounting is not going to be popular in Beijing under these circumstances. The Chinese govt's many critics are safe when they criticize the government for losing the peoples' money.
Agree that exports will continue to be important, but to where? The US consumer has been maxed out, the euro is a basket case, and there is very little else left around. The trick for China is going to be managing a very slow and gradual diversification away from the US market, so as to avoid upsetting its holdings of US Treasuries.
So what is the only option left? I would say that it is stimulating Chinese consumer spending. But that will only become meaningful when private businesses are able to secure bank loans on an even footing with SOEs and when capital markets are much more open than they are now.
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