Wednesday, July 15, 2009

Hot Money Heads to China: China's Foreign Exchange Reserves Climb Above $2 Trillion

This is a serious problem for the dollar. As I have pointed out, even if Bernanke maintains a tight money policy (which he is this week), there are so many dollars overseas because of its (shaky) international reserve status that, at this point, a panic could occur at anytime even if the Fed isn't printing anymore money. We may be near that point.

The People’s Bank of China, the central bank, announced on its website that foreign reserves reached $2,132bn at the end of June after a rapid accumulation of funds in the second quarter.

The reserve build up in the second quarter was $177.9bn, including a monthly record in May of $80.6bn.

Hot money now appears to be heading to China.

The quarterly fx increase figure far outstrips China’s trade surplus and inbound foreign direct investment for the same period, proof that the accumulation of funds inside the country is being driven by other factors.

Chen Xingdong, of BNP-Paribas, in Beijing, calculated that after taking account of the trade surplus, foreign investment and the impact of changes in global currency valuations, about $70bn in hot money came into China in the second quarter


  1. Wenzel,

    I see you're making a similar case for future price increases as a result of dollars returning to the US at a later date. I read the same point being made here:

    Could you please explain, mechanically, how that works? For example, the author in that link differentiates between "selling" dollars and "spending" them. I think in strict economic terms, anytime you SELL dollars you are spending them on something (that which you're buying), but I guess the point that author is making is you can "sell dollars" to buy Treasuries, which somehow "exports inflation" but if you "spend dollars" then you get raw materials and the inflation is imported back home.

    But I am a little confused on how that process works mechanically (importing/exporting inflation as well as spend vs. sell dollars). I'd appreciate any clarification you could add.

  2. @Taylor

    The way I see it, if you spend dollars on anything that results in dollars coming home, it is potentially price inflationary.

    China props up the dollar to a degree by printing more yuen to buy them. If it stops doing so, Chineese goods will become much more expensive for Americans.