China's foreign exchange reserve diversification of the world currency market and U.S. influence - Zhong Dajun

[Editor's Note: China's economy What is the relationship with the world economy? China's economy have any effect on the world economy? Are Mr. and Professor Song Guoqing Zhong Dajun issued two articles, from the monetary, financial and commodity markets to examine two aspects of China's economic impact on the world.

January 24, 2006

First, China's economic performance in the world, important

Recently there have been foreign reporters to interview me, requiring foreign exchange reserve diversification talk about the impact on China's views. My main point is: foreign exchange reserves depends on a variety of changes in China's economic interests and political interests, the Chinese Administration of Foreign Exchange have to consider their own economic interests and economic risks, but also consider the international relations, but in the end considering the economic benefits and economic risks.

China's foreign exchange reserves, mainly related to a variety of issues on the international situation and China's economic situation in the world to judge. If China believes that a country's economic problems, with the weakness of a currency, it will appropriately reduce the holding of that currency. Select firm and has prospects of currency appreciation, the goal of China's foreign exchange reserves.

Of course, in this selection process, there are certain issues of international relations. This was reflected in Sino-US relations. We all know that a few years ago, more than 80% of China's foreign exchange reserves in dollars, being aware of the prospect of a possible devaluation of the U.S. members, since 2003 China began to diversify foreign exchange adjustments, its content but to sell dollars and buy the euro and the yen. As for the diversification of China's foreign exchange reserves to what extent, as a state secret, and I do not know here, but estimates the proportion of dollar reserves in the country have been from the previous 85% to 60%.

Adjustment is the reason because of China's foreign exchange reserves, since 2003, the dollar depreciated 30% against the euro, the yen depreciated by 20%. Thus in recent years, China's impact on the world economy much <[--]><[--]> affect China's foreign exchange adjustment of the entire international financial markets, China has become the international financial market will affect the strength.

Never mind the adjustment of China's foreign exchange reserves in this number of dollars thrown, the number of euro buying, as long as China has such ideas and actions, the international currency market speculators will surely follow. This is the international currency markets in China as a lever throw a phenomenon <[--]><[--]>- or tens of billions of billions of dollars, often pulling trillions of dollars of follow-up.

Not only affect China's financial adjustments to the world currency markets, China's import and export trade also affected the prices of the world's major trade goods. Because of the high demand for energy products and imports, resulting in the international market in recent years and the production energy products prices rose sharply. These expressions have shown that the Chinese economy in the current world economy, of vital importance.

Second, China's foreign exchange reserves, economic relations with the United States

The end of 2005 China's foreign exchange reserves estimated to have exceeded 8,000 billion U.S. dollars, but China has purchased a number of U.S. Treasuries, the dollar's foreign exchange reserves in China account for what percentage? Was a clear thing. Analysis of this issue, I can only rely on years of research experience on the economy to determine.

Here, the number is not the important issue, it is important from a national point of view of economic links between the countries of state relations. China is now second only to Japan's second largest foreign exchange reserves, 8000 billion in foreign reserves, of course not all on the domestic, at least half to come into the international financial markets to hedge on the appreciation of the countries in which to purchase bonds is a major source. In recent years, China has about 300 billion U.S. dollars of foreign exchange reserves will be used in the U.S. bond market, China and other Asian countries the number of bonds purchased in the United States has accounted for a large proportion of U.S. debt is estimated to reach 30% of the total number of 2 trillion or so. China to buy U.S. treasury bonds is estimated to account for 7% of the total U.S. debt to an even greater, China's holdings of U.S. Treasuries, U.S. financial markets and the state will bring a series of financial. For this reason, diversify foreign exchange reserves in China, and Sino-US relations on the U.S. economy has far-reaching implications.

U.S. military forces in recent years because year after year, huge expenditure, resulting in a huge fiscal deficit. U.S. Treasury bonds to a large extent support the financial position of the United States. If the diversification of China's foreign exchange reserves caused the dollar devaluation is bound to follow the lead of other countries to sell the dollar, then that is selling U.S. Treasury bonds, which the United States what the financial impact can be imagined. But China will not do so, the need to look at the health of the U.S. economy. I think that does not exist here, the number of political reasons, the starting point of China's major economic consideration.

Indeed, the U.S. economy, there are many that do not mind having peace of mind a place in China, which is larger financial bubble in 2001, the Fed easing sharply, cut interest rates 13 consecutive times, the U.S. interest rates down to record low of 50 years, so the one hand, to save the U.S. capital markets, the U.S. stock market back on 11,000 points, but also led to speculative capital surplus of the United States, money bubble full, real economy and the virtual economy opened more and more distance.

However, in a monetary and financial bubbles all over the world, only China in the world for the foam to provide a solid material foundation. According to the traditional experience, the central bank will cause a substantial easing inflation, and happens to be the great development of China's foreign trade for the United States provided a large number of cheap goods, to some extent to contain inflation in the United States, long-term maintenance of low interest rates the Fed has created a favorable conditions.

Now let's look at history, the late 80s and early 90s, the Federal Reserve releases too much liquidity into the capital markets, contributed to the 90's on the U.S. stock market "technology bubble." Early 20th century, the Fed once again release the "money taps" on the one hand to stabilize the U.S. capital markets after the technology bubble burst in the U.S. stock market crisis is not catastrophic; the other hand, imports from China and other developing countries, a large number of kind of cheap goods, suppression of domestic inflation, the remaining funds and real estate bubble led to the re-formation.

However, this also led to increased dependence on U.S. foreign debt, the dollar's weakness is also gradually exposed. This situation also led to adjustment of foreign exchange reserves of China and other countries determination.

Third, China's economic importance to the world economy

Here I would like to stress once again that the Chinese economy to the world economy. Only a few people now realize that China's economy to stabilize the world economy. As the years China has been pursuing the development of mercantilism thrift strategy, live frugally, work hard, to the outside world provides a lot of cheap goods for export. In other words, in a full financial bubble of the world, only China in the form of deflation honestly engaged in the real economy, as the outside world doing a noble sacrifice. However, once the slowdown of China's contribution to the outside world, not just the U.S. economy will fall into a whole world of inflation among the world's financial bubble will burst, the importance of China thus displayed. Thus, the U.S. treatment of China's foreign exchange reserves to be very concerned, not only affects the U.S. economy, also affect Sino-US relations. As relations between China and the United States is very important economic interests in China during the adjustment, can not but consider the political relations will certainly be in a cooperative attitude in some of the economic policy adjustments. However, the outside world must recognize the fact that there, correct understanding of the role of China.

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Enclosure:

Macroeconomics and the China factor

<[--]><[--]> Demand for raw materials, price liberalization, deflation "

China Economic Research Center of Peking University Song Guoqing

December 5, 2005

[Note: The first China (Shenzhen) International Futures Conference on 3 December 2005 4 March -12 Wuzhou Guest House in Shenzhen, China held a warm room, the following is the Song Guoqing teacher December 4 Record speech forum. ]

Very pleased to have this opportunity to discuss issues with our friends, thank the organizers of the meeting to organize such a meeting. May participate in such a meeting, I feel very honored. My topic is "the real China factor", has just introduced the topic with a little change. China factor is now the international commodity markets have often said the China factor. Of why the subject is to factors such as an analysis of China.

The main contents of the four aspects: one is the impact on China of the two phenomena. Second, China's influence in real terms. Third, the unexpected change in meaning. Fourth, the study of Chinese economy, the world's financial operations.

I now speak of two phenomena in the first, the leadership of China's economic boom in world commodity prices, such a phenomenon can be described from different angles. I use a more comprehensive look at the relationship between the two. China Economic indicators can have a lot in this which we will use the general said the number of indicators like GDP, GDP indicator but there may be some other aspects. I use it inside the index of industrial added value of this index for some processing. CRB index linked then talk to look at the situation.

This is my own in China since 1975, the industrial added value index (see Figure), which is divided into quarters. The original data are annual, this made a deal. The above line is the index of industrial added value made some deal, considering the bias (see photo), considering his tendency to see the actual value of the deviation after the look. Such as relatively lower in these places (see photo), these low areas will become something like (see photo), the bottom is 01 years. Deviation after we have done, and then compared with the CRB index. Some indices such as metal materials can also do quite a strong relationship. At least from this map we can clearly see the CRB index for China's industrial boom has a very strong, direct role, and is the leading role. In this sense, the China factor is not only the phenomenon of the past two to three years, there has been over the past years, the phenomenon 20,30. But sometimes serious, sometimes not too serious. And the China factor from the perspective of goods, prices have gone up, we can see from the inside the China factor. International commodity prices are low, you can see from the China factor. Like in 2001 when the lowest commodity prices is "911." Go all the way down from the 93, which can be considered the China factor. CRB index of the CPI than the United States get the following results. The view from a longer historical time, at least the past 20 years, China's industrial boom situation on the CRB index has a very strong role, and is a leading role. No matter how analysis can see very clearly. This is a phenomenon we have seen. This phenomenon can be predicted even a sense. CRB which can be used to predict the direct metal materials price index, industrial raw materials price index. Of course, the specific species which also has a strong relationship.

CRB Index fell all the way from 95 years, fell in 2001, 01 years is a bottom up and from 01 onwards, and now a rally. Large trough occurred in 911 years, that is the end of 2001, early 2002 began to go up. The end of 2001, early 2002 we can expect to have a very strong economic recovery. In fact my prediction is in March 2004.

Second, the phenomenon of China's domestic demand led imports fluctuations, import and export have a lot of impact, but more significant impact on imports. China's imports in 2004 increased a lot, suddenly appeared in this year's big trade surplus, which is the result of fluctuations in domestic demand. Exports relatively more moderate. Mainly investment goods imports, domestic demand is mainly investment volatility fluctuations, investment expansion, or under control to give rise to changes in raw material imports. This situation is very intuitive.

We made this map imports of Chinese goods GDP, we see a rising trend also. 1995 to the present experienced a relative decline in first, 95 to 98 years in this period of absolute decline in China's imports, followed began to rise. 02 to rise very much, this time to see very clearly, in fact, the same way in front of the case. This reflects the problem? Because the exchange rate of imports and exports are a problem, there is an official exchange rate, market rate, according to market exchange rate be another situation. In addition, we hope to do with the price index of imported goods this thing, but not the price index. The decade after 1995, so the ups and downs in the original case, too, but there are some price index can not tell. I brought my own made out of subjective factors that can reflect things. Chinese goods on the impact of international commodity prices can be volatile, mainly through domestic demand is mainly due to fluctuations in imports.

From the perspective of predictability, such as the decline in imports this year, in fact, look at last year's very clear. From domestic demand, the beginning of macro-control, money supply, investors can predict the basic situation of import of this situation.

There is also a figure behind this is the case (see photo), this is a trade surplus-GDP ratio, a situation similar with the previous case. After 95 years we have seen a big drop and then rise. China's stock with the impact of consumption, this is mainly as food stock inventory change through changes in import and export. The volatility of consumption only in very occasional circumstances will lead to changes in import and export, affect international prices. And mainly through food prices to influence this. The main reason for this fluctuation consumption or domestic real interest rates get too far off the mark. 20, when inflation, interest rates are more than a dozen, so rush to buy stocks. If there is no such reason, consumer should be quite stable. I believe in the future to get 20% inflation rate, which in itself is very hard to imagine things. Get 10% of the interest rate is hard to imagine. This should be purely macro-control problem, not the kind of phenomenon. Consumption caused by changes in import and export of such channels is difficult to happen again. Investment is still a very important channel.

Now I want to talk about China's influence in the direct and indirect impacts, directly affecting imports and exports of China, China Import and Export direct effect on changes in domestic demand, a direct result of changes in international commodity prices. Indirect effect is due to changes in the Chinese economy, China's import and export is the change of the outside world affect the export, import and export changes caused by changes in other economic substance, and then cause them to import and export, or other changes. From this channel on commodity prices, financial change. An example of this is obvious, especially in Japan, Southeast Asia, the impact on the whole. Here I would like to mention the Asian financial crisis in this matter. From the front of this figure, we can see, 93 years later, China engaged in macroeconomic regulation and control, China's trade surplus rose quickly. This increase, rising to the decline of trade in Southeast Asia, Southeast Asia and China's surplus in the trade surplus is a strong anti-relationship. China engaged in macro-control, the pressure of domestic demand, imports fell, the other side to do the opposite. The same is true of this year. So very significant decline in surplus this year, Southeast Asia, as China increases trade surplus this year is very powerful. That which has caused the price of oil changes. Changes in domestic demand, imports fell directly to China. Another change through the trade surplus, causing the Southeast Asian economic change. Changes in their economies over Zaifan global commodity prices, impact of financial markets, which also include China, including the direct impact. We are the indirect and direct impact on together, they would see that the impact is very great. In fact, when a double. On trade, industry conditions change, we can clearly see changes in China's macroeconomic impact of international commodity.

Front of the two phenomena, mainly talked about the impact of the two phenomena in China. We talked a little behind the substance of China's influence. China's so-called China effect is not real large, with the number of copper, the amount of oil use in China is absolutely not too great. In the past I wrote an article written to the prediction and error problems. Not how much you absolute, it is very important. Does not mean that the incremental extent implied by these changes is the unexpected change a thing. Expected changes in the already digested, it causes only the unexpected changes in price volatility. Unexpected changes in the creation of this area, China in the world, to say the least to keep pace with the United States, something on an order of magnitude. Should be called unexpected changes, or predicting the U.S. economy forecast absolute error absolute error compared with these two things together on the world market fluctuations can have a significant impact. At least from this perspective, the China factor and the U.S. factor is now two in the end who is more powerful in the commodity markets is hard to tell who is more powerful, perhaps the initial feeling is similar. In the financial markets, now or in the United States a significant influence. But China's influence is increasing rapidly.

Unexpected things does not mean that China has special things, unexpected things first is the unexpected macro-control, economic management is unexpected. Yesterday, today, is due to regulatory control, or because yesterday, so today to further control regulation, or regulation of this regulation provide reasons for tomorrow. From the perspective of the market we do of course hope to see China's macro control what to do next. I look forward now to getting a deep understanding of three months, the policy may be to do some planning departments. But what is the situation after three months, it is basically difficult to grasp from the policy bias, because he has to constantly change. The first surprise is the meaning of the macro-control for the management of unexpected. Of course there in the continuous improvement of macro control, China is gradually than in the past fluctuations in domestic demand some changes. Situation as in the past there will be ups and downs, but it is getting weaker, and this is progress. But exchange rates have a new situation, the absolute amount of this trade is growing. Commodity prices and this is a major source of financial market turmoil.

Unexpected second meaning, do predict the private sector. In fact, predicted the Chinese economy very good, as long as careful to do it. If the past is not market-driven, who do this go to a good thing, not much meaning. From government departments, to do no good and bad relationships. But those who are on the market, there is not much different. One mistake a pair of too poor. So the private sector and the market have a strong incentive to improve the economic forecast, from this perspective, and now slowly in the promotion of research in this area.

This is an article I have written to sum up our case in the past. Our current situation of China's economy it is not difficult to make a good prediction, we can put you over the past number of years to forecast the Chinese economy have to take the next step to look. I have collected some forecasting, including foreign counterparts, domestic government departments, research institutes predicted that market forecasts, including the predictions of the securities companies, compare these to take over, in fact, is very interesting stuff. I do this almost 10 years, every month, every quarter to do, to do almost 7-8 years. To do that together with the market.

We look at this picture back (see photo), now we see a variety of economic forecasts that next year will be. We look back at this period 1994-2001, the forecast results in the end how? In the course of this section, we always felt he would go back to see who the last Abduction no one dares to look Shui, all the way wrong, wrong in 2001, no one country has seen a lot. I own the information collected is not be one. We can look back to 01,02 years, a large trough, how to do economic forecasting? The end of 2001 to early 2002, large turning point, I do out of the grasp of inflection point half a year, everyone says I must be mistaken. I want to do it seriously, the macro-control study, this potential is still very large.

This is the content I want to say Thank you very much!