[eocavrWM]

Wow! Looks like China is starting to throw some weight. This is some major news and may not play too well in the market in the morning. Washington is getting two major snow jobs. Further substantiation is merited but Asia Times is a very reputable source. With the Germans just announcing it will partner with other countries to bailout Greece and the rest of the PIIGS....the world just got very interesting overnight. These are some major occurrences......



Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

Inner Workings Blog Archive China Dumps US Asset Backeds and Corporates

[eocavrWM]

Double wow...looks like China isn't going to play the inflation game (carry trade hot money in devalued dollars) by raising their currency. They are going to reduce their trade balance by actually raising salaries....

Some major game changing economic posturing going on.......

Feb. 10 (Bloomberg) -- China, under international pressure to reduce its trade surplus, may choose to shrink it through raising workers’ wages rather than letting the yuan appreciate, Credit Suisse Group AG said.

Higher labor costs would cut Chinese export competitiveness while boosting domestic spending power and sustaining economic growth, according to the bank. Premier Wen Jiabao’s government has been pressed by U.S. and European officials to end a 19- month yuan peg to the dollar to help diminish trade and investment imbalances that contributed to the credit crisis.

“Wage increases are a better option because they largely benefit Chinese workers,” Tao Dong, a Credit Suisse economist in Hong Kong who has covered the Chinese and Asian economies for more than 15 years, said in an interview yesterday. “Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico.”

The strategy may limit gains in the yuan to 3 percent this year, according to Tao. This month’s 13 percent increase in minimum wage in eastern China’s Jiangsu province indicates that higher pay will play an important role in officials’ efforts to rebalance growth in the fastest-growing major economy, Tao said.

In Jiangsu, which was the nation’s third-largest exporting province in 2008, the government raised the minimum wage to attract workers, the local labor department said. Shanghai, the No. 2 exporter, is following suit from April 1, Mayor Han Zheng said. Beijing, Zhejiang and cities in the southern Guangdong province also plan increases, the China Business News reported Jan. 27, citing labor officials.

Yuan Jump Unlikely

The wage decision “argues against a large one-off yuan revaluation,” Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, wrote in a note this week.

China has kept the yuan at about 6.83 per dollar since July 2008 to shield exporters from the global slump after a 21 percent gain in the previous three years. The foreign ministry last week rejected U.S. President Barack Obama’s call for the yuan to appreciate, saying the Chinese currency has little impact on American trade deficit.

U.S. and European pressure will only delay appreciation because Chinese officials won’t let themselves be seen as buckling, Tao said.

“Beijing will continue to resist pressure from the U.S. and other nations and look for ways that will benefit its own economy when it seeks to contribute to global rebalancing,” Tao said. “Higher wages will aid policy makers’ aim to boost domestic consumption and move away from depending on exports.”

‘No Delay’

President Hu Jintao on Feb. 3 urged “no delay” in efforts to reduce dependence on exports and investment and boost service industries and consumption. China’s current-account surplus fell 35 percent last year to $284.1 billion as exports declined because of the global slump.

The government will need to manage inflation expectations as wages climb, Tao said. Consumer prices jumped 1.9 percent on year in December and may have climbed 2.1 percent in January, according to the median estimate of economists in a Bloomberg News survey ahead of a government report scheduled for this week.

Improved global trade is boosting demand for labor in China, which overtook Germany last year as the world’s biggest exporter. China’s overseas shipments jumped a more-than-forecast 17.7 percent in December from a year earlier and imports surged to a record.

China May Choose Wages Over Yuan Gains to Narrow Trade Surplus - Bloomberg.com

[halfstreet]

China Fund Discloses Shares in American Corporations - NYTimes.com

[eocavrWM]

Flush with cash despite the global economic downturn, China’s sovereign wealth fund quietly bought more than $9 billion worth of shares last year You do realize that China because of it's statist makeup can change it's policy decisions from year to year or month to month?

Nevertheless, As I noted the dumping report requires further substantiation but given the Fed's announcement today the story has legs since they could be engaging in risk aversion with coming bond spreads as the article suggests....

Bears continued monitoring...

[halfstreet]

Nevertheless, As I noted the dumping report requires further substantiation

Then why speculate now? Why not wait until you have some... you know, facts?

[eocavrWM]

Then why speculate now? Why not wait until you have some... you know, facts?

Facts are gathered...it's called analysis. The situation is still developing....the world is not static. I will post backup accordingly. This is an important item to follow because it would put pressure on banks and would cause big increases in borrowing costs for businesses.

[eocavrWM]

Could be a combination of tit for tat and again the bond spreads between corporates and treasuries widening...


Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

China PLA officers urge economic punch against U.S. | Reuters

[halfstreet]

Facts are gathered...it's called analysis. The situation is still developing....the world is not static.

But you've offered no facts whatsoever, only speculation and analysis of that speculation.

Were we to start a thread on every possible event that might possibly happen, the number of threads would instantly be infinite.

Why not wait until you actually have confirmation, rather than littering up this board?

[eocavrWM]

Because you are not the authority on this forum.Please offer counter-factual information rather than your usual attack the messenger tactics and I will engage with you otherwise stop detracting from the thread. Some people may be interested in world developments . If you can't speak to a topic and want to just focus on the speaker I'm not interested in further engagement. Your reputation precedes you so it's not even worth it....

[halfstreet]

Because you are not the authority on this forum.

Which forum? International Politics?

Do you claim to be an expert on international politics? (for the record, I do not)

Please offer counter-factual information I did; well, actually, I offered factual evidence, which is by your own admission, more than you've done with your speculation.

rather than your usual attack the messenger tactics I did not such thing; I pointed out the lack of factual content in this thread and posed a question. If that makes you feel "attacked" there's really nothing I can do to help.

So again: what is the point of speculating and analyzing a situation when we have no facts present?

[eocavrWM]

Yawn....I see you miss Russ

[Arkadiyas]

Morley, get off Doomy. I usually don't post in the econ threads, but I like and read his posts.

[halfstreet]

Yawn....I see you miss Russ

Nice way to duck the question and that's definitely an attempt to make this "personal".

(I "miss Russ" in the same way I miss TB and the Plague. )

[halfstreet]

Morley, get off Doomy. I usually don't post in the econ threads, but I like and read his posts.

SO we should just ignore the fact that the info he posts is generally wrong?

[Flefebleaft]

SO we should just ignore the fact that the info he posts is generally wrong?

As much as we ignore the fact that much of the info posted by lots of people on Philadelphiaspeaks is generally wrong. If Doom's views are b.s., this thread likely won't pass the test of time and it will die. Funny how that works without any need for intervention based on some rulebook only you play by.

[eocavrWM]

Back to the topic.....

This is a very important development and merits following and discussion because it has large implications. Speculating on whether it has no merit can be left to those who engage in "uninformed ignorance." Informed ignorance is not always right but it leads to discovery learning nonetheless and that is the point oftentimes with my posts. I appreciate those who see value in my methodology...

The following piece is from the Telegraph. There has also been some substantiation in various financial blogs. The one thing about this story is the leak aspect...whether it was a legit leak or a controlled agenda driven one....especially given the bond vigilante attacks in the Eurozone debt crisis...

A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing.

BNP Paribas said the move has major implications for global risk assets. "The message from Beijing is that we don't like this environment," said Hans Redeker, the bank's currency chief.

"When the world's biggest investor turns risk-averse, that is something you take notice of. We think this could become the new theme for the markets in the medium-term," he said.

The directive covers both the State Administration of Foreign Exchange (SAFE) and China's state-controlled commercial banks. Together they have an estimated $3 trillion (£1.9 trillion) of foreign holdings.

The exact break-down of China's holdings are a state secret but it is understood that SAFE bought large amounts of corporate debt as well as municipal and state bonds during the boom years of 2006 and 2007. Any move to liquidate holding of California debt at this crucial juncture could have serious implications.

The exact motives for China's shift of strategy are unclear. Analysts say the authorities may fear that the end of quantitative easing by the US Federal Reserve could cause risk spreads to widen sharply, triggering heavy losses. The shift in policy appears unrelated to the US spat with China over Taiwan.

SAFE has some very sophisticated economists. The chief investment officer of its reserve management department is Changhong Zhu, until recently head of derivatives for the hedge fund operations of the giant US financial group PIMCO, and viewed as one of the 'rock stars' of the global hedge fund industry.

The move by Beijing comes at a time when China's current account surplus is falling. This reduces reserve growth, reducing the supply of global liquidity.

Mr Redeker said this will have the paradoxical result of boosting the dollar. Flight from risk can lead to an automatic rise as hedge funds, banks, and investors across the world cut back leverage on dollar balance sheets.

David Bloom, head of currencies at HSBC, said the explosive dollar rally over the last six weeks has been the reversal of the dollar carry trade. "It has been short, sharp, and vicious. People borrowed in US dollars to invest in places like Brazil, Turkey, and New Zealand and now it is unwinding."

"We don't think the dollar rally is going to last much beyond the first quarter because we're in a new world of rotating sovereign crises where politics matters again. It's Greece right now but it could be the UK next, and then US which has yet to take any steps at all to tackle it fiscal deficit," he said.

China orders retreat from risky assets - Telegraph