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Megadoom Alert! China Wants 'deal' To Prevent Dollar-backed Asset Dumping, Change from export-growth strategy pondered

George Hayduke
post Sep 25 2008, 12:55 PM
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QUOTE
Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.


http://bloomberg.com/apps/news?pid=2060108...&refer=home



This post has been edited by George Hayduke: Sep 25 2008, 12:57 PM
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Sanders
post Sep 25 2008, 01:01 PM
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In related news,

Europe and Japan turn cold shoulder to U.S. plea for bank bailouts
By Carter Dougherty and Matthew Saltmarsh
Herald Tribune, September 22, 2008
http://www.iht.com/articles/2008/09/22/business/euro.php

I live in Japan, so, my response is -

THANK GAWWWD!!!

It is a delicate situation though, Japan and China hold MASSIVE amounts of US T-bills, way over a trillion together I'm sure. They don't want that to depreciate, nor do they want to lose their #1 export market. But there's a limit to how much one will put up with being slapped and beaten by their drunken spouse.
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George Hayduke
post Sep 25 2008, 01:55 PM
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Oh, yeah, it's happening. Check this out:

QUOTE
BERLIN (Reuters) - Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it would now have to accept greater market regulation and a loss of its financial superpower status.


http://www.reuters.com/article/topNews/idUSTRE48O2LS20080925
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George Hayduke
post Sep 25 2008, 01:57 PM
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The thing about Japan is while the islands that comprise that nation rest where four techtonic plates meet it has more than 4 dozen nuclear power generating facilities. The corporation that is the USG is using HAARP to blackmail the corporation that is the Japanese gubbermint!

This post has been edited by George Hayduke: Sep 25 2008, 01:58 PM
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Sanders
post Sep 25 2008, 02:08 PM
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QUOTE (George Hayduke @ Sep 29 2008, 12:57 PM) *
The thing about Japan is while the islands that comprise that nation rest where four techtonic plates meet it has more than 4 dozen nuclear power generating facilities. The corporation that is the USG is using HAARP to blackmail the corporation that is the Japanese gubbermint!


Yes, and the Japanese gubbermint holds half a trillion in US securities. So everyone has their cards to hold, or to play. Quite interesting. Wouldn't the news be interesting if they talked about this stuff?? (But of course, none of that is fit for general-consumption.)
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