
	Overdrive Boom with No Bust Harmonious Society Information Revolution Global Economic Crisis Ramping up its export juggernaut and taking full advantage of WTO entry, China’s economy in the first decade of the new millennium was “boom with no bust.” The information revolution fed more growth, as hundreds of millions of Chinese came online. But the Internet also became a forum for discontent, and the new leadership team of Hu Jintao and Wen Jiabao acknowledged growing environmental and social justice concerns with their call for a more harmonious society. Then, as the credit crisis in the US spread into a global economic crisis, China’s export-dependent growth appeared in jeopardy, and fears of a Chinese crash surfaced. But, as in 1998, China weathered the storm, and emerged in 2010 as the world’s largest exporter, largest foreign creditor, and fastest growing major economy, poised to soon surpass Japan and eventually eclipse the United States as the biggest economy on the planet.

China's Reserves are Worthless Because They Can't Use Them

Period: Overdrive (2000s) | Global Economic Crisis

Carl E. Walter

Managing Director, China International Capital Corporation

Carl E. Walter has worked in China′s financial sector for the past 20 years, participating in many of the country's financial reforms. He played a major role in China′s groundbreaking first overseas IPO in 1992 as well as the first listing of a state–owned enterprise on the New York Stock Exchange in 1994. He held a senior position in China′s first joint venture investment bank where he supported a number of significant domestic stock and debt underwritings for major Chinese corporations and financial institutions. More recently, he helped build one of the most successful and profitable domestic security, risk and currency trading operations for a major international investment bank. He holds a PhD from Stanford University and a graduate certificate from Beijing University. He lives in Beijing.

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They’ve got $2.4 trillion. That number alone suggests that there’s something wrong. But, anyway, it’s very interesting if you look at the BOC’s financial stability report, which they put out every year, before 2008, when they only had like $1.5 trillion at that point, they were so proud of the strength of their foreign exchange position, and as soon as Lehman Brothers went bankrupt, it was like they woke up. They said, “Oh, now we have all of these US dollars. That’s our problem. That’s not their problem. How did we get stuck with so much currency that could be worthless tomorrow?”

So, I think the issue is that their own domestic policy with regard to the value of the RMB has created this humongous imbalance in reserves that goes way beyond anything they could possibly use. So, how do they use it? It’s not really that easy to use them domestically, because they buy those dollars from the exporters and give them RMB. So, those dollars are already bought and sold domestically. Unless you want to have inflation here at very unreasonable levels, they can only use those dollars internationally. That’s fine. Show me who the group of international companies that’s going to invest these dollars overseas. Is it going to be China Investment Corporation? That’s only 200 billion. We’re talking about $2.4 trillion. Are we talking about China Development Bank that’s got its Africa fund? That’s $10 billion. How much money can you use in Africa? Are we talking about CNPC or Sinopec that’s trying to buy resources overseas? That’s fine, you can do that. But where are the companies that can really invest overseas? That is the real issue. If you’re going to use that money and recirculate it in the international markets, you’re need to know somebody who knows how to invest it and they haven’t grown that kind of capability yet. The banks don’t have it, the corporations don’t have it and the government itself doesn’t have it. So, I think they have a real problem. Number one.

Number two, they have all these US treasuries. Why do they have US treasuries? This is very, very simple. The US government treasury market is the deepest financial market in the world. There are 600,000 trades a day. $1 trillion trades every day. There is a lot of liquidity. You want to dump your treasuries? You can dump them. You want to buy more? You can buy them. Now let’s talk about the Chinese government bond market here. You know how many trades there are every day in the Chinese government bond market? On average, 50. Why is that? Because when the banks buy the treasuries from the Ministry of Finance, they put it in their investment account. They buy it at interest rates that are below market clearing level. If they want to sell them, they’re going to take a loss, so there’s no secondary market in government bonds here, or almost any bonds. So, you have to hold US Dollars, there’s no choice. Are you going to hold Euros? Are you going to hold Yen? Where can you go? So, there was a fundamental unbalance in economic policy here from 2005 on and part of it was the RMB. If the RMB had been allowed to float much more aggressively, maybe it would’ve shut down a lot of low end exporters, but on the other hand they wouldn’t have had this $2.4 trillion. This money is not worth anything because they can’t use it.