yodacaia

Zesty Wrote:
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> It sucks to be China right now; the Euro is in
> trouble, the Dollar is on a kamikaze mission;
> where do you park that $4 Trillion plus foreign
> reserve that China has. This might be a rationale
> that investment in emerging markets may surge as
> China seeks out other currencies/investment
> opportunities to park their cash (maybe the Real,
> the Lira or maybe increased investment in
> commodity rich Africa - the Rand?). Thoughts?


What exactly are they going to invest in? Building high speed rails? That doesn't seem to be working out so well...

Several points:

1) There are not many markets that are large enough to trade in trillions. The market cap for all EM equities is less than $2T (source: Goldman Sachs), and the largest component of that is China itself!

2) If China wants to keep their currency undervalued relative to the dollar in order to be able to export to the US, it must accumulate US assets (treasuries) to offset its current account surplus. The accumulation of the large reserves is a consequence of China's trade policy, not of American profligacy. The so-called "nuclear option" where China dumps its treasuries on the market, is smoke and mirrors.

3) The dollar as a global reserve currency is a public good, which benefits the entire world while having both costs and benefits to the US itself. The largest cost is that it serves as a large drag on aggregate demand since all other countries want to export to the US and accumulate its assets as a reserve. The largest benefit is that financing purchases is less expensive in the US because of the liquid capital markets.


Food for thought: China now holds $3.2T of foreign reserves, which is ~5.1% of global GDP ($62T). This has only happened twice before in history: in the US prior to the Great Depression and in Japan in the late 1980s prior to the Lost Decade.