The China threat I always worry about

ARTICLE: "A Growing Mystery as China Amasses Foreign Currency," by Andrew Batson, Washington Post, 13 April 2007, p. D8.

China reports a massive and somewhat hard-to-explain boost in its US currency holdings: all of a sudden at $1.2 trillion.

Best guess? China did a swap of a very large sum sometime in 2006 and just now brought the money home.

In a swap you simply trade currencies with some other money's holder, promising each other to return the money at some time in future. It's used to hedge against sudden shifts in valuation (like swapping your money for gold if you fear something spooky up ahead).

If just a swap, that tells us nothing. If that much extra money came in (like $50B that's hard to explain), then that is truly unsettling.

Bigger point: the lack of transparency overall on Chinese monetary regulation and general reporting. China's getting too big to be that opaque. Bad for us, bad for them, bad for business.

A good example of reality that's China freedom deficit is less dangerous to us than its rules deficit. Too many rules on politics, not enough sensible ones on markets.

Comments

[Mark in Texas]

Just like we outsource a lot of our manufacturing to China, the Chinese are outsourcing a lot of their banking to us. They have relative advantages for manufacturing in their cheaper wages and total absence of safety or environmental enforcement. We have relative advantages in Banking because of mandated transparency and not having government officials demanding bank loans for failing government owned enterprises.

One possibility is that the Chinese banking system is becoming more transparent and efficient and that money is only now getting on the books.