What the PBoC cannot do with its reserves(treasury dumping,forex reserve,stimulus)

China Financial Markets ^ | 02/22/10 | Michael Pettis

[TigerLikesRooster]

What the PBoC cannot do with its reserves

February 22nd, 2010

by Michael Pettis

It is a real toss-up as to which generates more bizarre comment in the international press: Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves. The revelation last week that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, generated a frisson of fear and excitement, leading one prominent newspaper to worry that “If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.”

And shouldn’t they get twitchy? After all this reduction in Chinese holdings of Treasury bonds comes from the USG’s TIC data, so it must be true that China is dumping dollars, right?

No need to twitch, it means no such thing. First of all, the data from which this was derived indicates national ownership of USG bonds only to the extent that foreigners are directly registered holders. It says nothing about what happened to the large amount of bonds held by the PBoC and other Chinese investors indirectly or in street names.

/snip

Can PBoC reserves protect China?

So the PBoC cannot give away the reserves without causing an increase in its net indebtedness. This is why I have often said, to the confusion of some of my readers, that Beijing cannot just recapitalize the banks with reserves.

/snip

So what are reserves good for? As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption.

[TigerLikesRooster]

China can hint that they would get tough on Treasuries and boast that they can stimulate domestic economy with huge forex reserves. However, they can talk that way but can't carry them out.

The history of Chicom leadership in a last decade or so shows that they cannot act decisively on controversial issue. N. Korean nuke problem is a good example. While it was festering into a serious problem, they still prefer the status quo fearing that any change would make things worse.

Chinese regime can be ruthless but it does not appear to be decisive so far. It won't be so until they meet their own catastrophic crisis.

[TigerLikesRooster]

P!

[ConservativeMind]

Ping for later detailed reading. Great article!

[bruinbirdman]

"So what are [foreign]reserves good for? As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption. They can only be used to purchase or pay for things from outside China. This means that reserves ensure that China can import foreign commodities and other goods as long as it can pay for them domestically. It also means that the PBoC can ensure the availability of dollars to repay foreign debt and foreign investment."

yitbos

[bruinbirdman]

Interesting to take a look at the TIC.

For instance, Bermuda has a GDP of $4.5B+/- and US Treasury holdings of about $200 billion.

yitbos