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China’s Foreign Reserves Become Political Weapon

Posted by Author on September 27, 2007

By Wu Hui-Lin, New Epoch Weekly Magazine (chinese), published by the epochtimes in English, on Sep 25, 2007-

According to a report in The Daily Telegraph on August 8, 2007, Xia Bin, finance chief at the Development Research Centre, commented that Beijing’s foreign reserves (US$1.33 trillion) should be used as a “bargaining chip” in talks with the United States, which is pressuring China to raise the value of yuan. Later, He Fan, an official at the Chinese Academy of Social Sciences, told China Daily, Beijing’s official English newspaper, that Beijing had the power to set off a collapse of the dollar if it chose to do so.

Impact on the Global Economic Structure

As much as Xia and He denied what was written in the Daily Telegraph and said the reporter “further processed” part of what they said into a threatening article, the possibility of Beijing underselling U.S. dollars from its foreign reserves to retaliate U.S. pressure to raise the value of the yuan has drawn great attention. President Bush, Secretary Henry Paulson of the U.S. Treasury, and the Central Bank of China all made statements regarding this issue.

If Beijing really undersells the majority of its dollar assets, what will happen to the United States and the global economy? Can the United States prevent it? What can the it do?

In an era of globalization, no country can escape the impact when a major economic system is disrupted. A great example would be the sub-prime mortgage loan crisis in the United States, which resulted in disasters in global stock markets. As for Beijing possibly disposing of a significant holding of its dollars to avenge the United States for forcing it to increase the value of the yuan, the U.S. government and intelligence are believed to have contingency plans in place.

China’s Irrationality Will Cause Global Disaster

In the past, those who supported lifting economic bans on China believed China would accept global business regulations as it gradually became part of the world economy, and hence the Chinese Communist Party (CCP) would behave in a way that is controllable.

If the CCP does undersell the majority of its dollar assets in its foreign reserves, it will result in global economic chaos. Although Secretary Paulson of the U.S. Treasury said China, being the second largest holder of U.S. treasury securities, possesses less than the daily trading volume of these securities, Paulson had to give this confidence talk as a political figure. What Paulson said is true. However, once the underselling starts, through the exaggeration of media reports, the international “hot money” will withdraw from U.S. dollar assets to other safe havens. The investors’ confidence in U.S. dollar assets, once devaluation starts, will result in chaos in the global financial markets, which will be worse than natural disasters. Natural disasters cause local damage and loss, whereas chaos in global financial markets will make everyone a victim.

Of course, if the U.S. dollar fell dramatically, China will be the biggest loser, since it still possesses an enormous amount of dollar assets. As much as Beijing wouldn’t want this to happen and may hesitate to start an economic war as such, the scary thing is, the CCP is a ticking bomb and its reaction is unpredictable. If one day the CCP was pushed into a dead end and became desperate, it is hard to say it wouldn’t initiate such a destructive act, and once it happened, everyone loses.

CCP Thug Nature— Kidnapping China’s Assets to Threaten the World

In July 2005, the People’s Liberation Army General Zhu Chenghu said Beijing might use nuclear weapons against the United States if it interferes with the issue of Taiwan. Regardless of whether or not Xia’s and He’s statements were Beijing’s meticulous plots, Beijing’s thug nature can be seen. Threatening the international community makes it obvious that the CCP will choose to drag everyone down once it can’t handle the rising prices of floating assets and the yuan, even at the cost of its enormous foreign reserves.

The foreign reserves do not belong to the central bank or the government- they belong to the people. The major source of foreign reserves comes from its trade surplus, which is a result of every citizen’s hard work. In other words, the Central Bank of China uses the domestic currency to buy foreign currencies in the foreign exchange markets and turn it into foreign reserves, which in reality is earned by the Chinese people. It looks like the Central Bank’s asset but in fact, the Bank just takes care of the foreign currencies for the people.

Since foreign reserves do not belong to the central bank or government, naturally the government has no right to use it arbitrarily, or it will cause irreversible damage. Central banks in democratic countries prioritize safety and liquidity instead of profiting when utilizing their foreign reserves.

There are three reasons: 1. The central banks don’t want to take risks to make profits and would rather make a fixed interest. 2. Central banks in developing countries often use foreign reserves as a means of rescue— once foreign investors lose confidence in the domestic currency or financial system, the central bank must use foreign reserves to buy back its domestic currency. 3. People in democratic countries have policies to supervise their currencies and will not allow its government and central bank to aggressively invest with foreign reserves or to invest in a black box.

The CCP apparently looks at China’s foreign reserves as its property and plans to undersell U.S. dollars as a political weapon at the cost of deflating its own foreign reserves.

Not only that, the CCP set up a state foreign exchange investment company that purchased US$300 billion in foreign reserves from the People’s Bank of China (China’s Central Bank). On June 22, 2007, with money borrowed from the Central Huijin Investment Company (largest investment company in China owned by the Ministry of Finance and the People’s Bank of China), the foreign exchange company bought 1.1 billion shares from the U.S. Blackstone Group at US$29.61 per share.

By August 20, 2007, each share of the Blackstone Group was worth US$23.39, this Chinese foreign exchange company lost US$628 million in less than two months.

The People’s Bank of China, instead of taking care of China’s foreign reserves, allowed US$628 million to evaporate from the Chinese people’s account in less than two months. The thug nature of the CCP’s dictatorship can be seen.

U.S. Dollar Shows Signs of Weakening

Facing Beijing’s threat to undersell U.S. dollars is itself a sign of the weakening U.S. dollar. When everyone in the world holds too much of a country’s currency, it can easily cause panic. U.S. dollars in Europe during the Cold War and British pounds during the era of “the sun never sets” had the same problem. How can the United States prevent this from happening?

The United States must let the world see how its economy is still strong and strengthen investors’ confidence to avoid panic. When it all comes crashing down, the United States will need to issue new currency. However, it will severely frustrate investors.

As to whether the U.S. will freeze Beijing’s assets in the United States, theoretically it can, but it will push the United States and China into a loop of revenge – like China now exposing disqualified imported goods when the world continues to publicize illegal products made in China.

Regardless of whether or not Beijing really undersells its foreign U.S dollar reserve and collapses the dollar, isn’t something trivial or groundless, considering a the heavy hitters in the U.S. and China that have spoken up on this issue.

The CCP’s irrational nature and unpredictable behavior have always pulled at the nerves of the international financial community and the CCP has turned into a ticking time bomb in the world’s economy.

Wu Hui-Lin is a researcher at the Chung Hua Institution for Economic Research

Original report from the Epochtimes

One Response to “China’s Foreign Reserves Become Political Weapon”

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