China has been accused of fixing its currency, the renminbi, at an artificially low level for many years. This has given China an unfair advantage in international trade, as it makes its exports cheaper and imports more expensive. However, this policy has also created some structural issues and problems for China's economy, such as:
Excessive reliance on exports and investment. By keeping its currency undervalued, China has stimulated its export sector and encouraged domestic investment in infrastructure and manufacturing. However, this has also led to a neglect of domestic consumption and services, which are more sustainable sources of growth and employment. China's economy has become unbalanced and vulnerable to external shocks, such as trade wars and pandemics.
Large accumulation of foreign exchange reserves. To maintain its currency peg, China has had to intervene in the foreign exchange market by buying foreign currencies and selling renminbi. This has resulted in a massive build-up of foreign exchange reserves, which reached over $3 trillion in 2021¹. However, holding such large reserves has opportunity costs, as China could have used the funds for more productive purposes, such as social welfare and environmental protection. Moreover, China faces the risk of capital losses if the value of its reserve assets declines due to exchange rate fluctuations or inflation.
Financial repression and debt accumulation. To prevent inflation and capital outflows, China has imposed strict controls on interest rates, credit allocation, and capital movements. This has created a system of financial repression, where savers are paid low returns and borrowers are subsidized. This has distorted the allocation of resources and encouraged excessive borrowing and lending, especially by local governments and state-owned enterprises. China's total debt-to-GDP ratio rose from 147% in 2007 to 286% in 2020², raising concerns about financial stability and debt sustainability.
These structural issues and problems have become more evident and acute in recent years, as China's economy has slowed down and faced increasing external and internal challenges. China has recognized the need to reform its currency policy and address its structural imbalances, but the progress has been slow and uneven. China has allowed more flexibility in its exchange rate since 2005, but it still intervenes to prevent excessive appreciation or depreciation. China has also taken some steps to rebalance its economy towards consumption and services, but it still relies heavily on exports and investment for growth. China has also implemented some measures to liberalize its financial system and reduce its debt burden, but it still maintains tight controls on interest rates and capital flows.
To achieve a more balanced, green, and inclusive growth, China needs to accelerate its reforms and allow its currency to reflect market forces. This would help China to diversify its sources of growth, reduce its dependence on foreign reserves, improve its resource allocation, and enhance its financial stability. It would also benefit the global economy, as it would reduce trade imbalances, ease trade tensions, and foster international cooperation. However, such reforms are not easy to implement, as they entail significant costs and risks in the short term, and face political and social resistance. China will need to carefully calibrate the pace and sequencing of its reforms, and communicate its policy intentions clearly and credibly to the public and the markets.
I have been thinking about this recently. We saw with Russia what happens to a government's 'foreign reserves'. The ECB stole them all and is even discussing given them to Zelensky! China's $3trillion in foreign reserves could easily end up a $3trillion donation to their biggest enemies in Taiwan.
There is another way to weaken a currency - low interest rates.
With CBDCs replacing cash, china could easily roll out negative interest rates. Seize people's savings and what are they going to do about it? withdraw it into cash that was just replaced?
I heard that China's entire Domestic housing market was worth $70 trillion.
So even if they sell all their US bond holdings it wouldn't cover much of their housing debt. If their economy starts to see a massive shift away from property ownership the slide would be unstoppable.
Many of the smartest Chinese citizens are investing in overseas markets (where even as a foreigner they likely have MORE protection than if they buy an asset in china). To the Chinese citizen investing in Vancouver, they don't even care about a small decline in house prices - because if they keep the assets in china they are risking 100% of it being seized by the government.
You raise some interesting points, but I think they need some clarification. I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds. China does not need to sell its US bond holdings to cover its housing debt, as most of its debt is domestic and denominated in renminbi. So it's mostly citizens owing money to the government banks. China's housing market is not quite worth $70 trillion, but rather around $52 trillion - however that valuation is itself contentious. China's currency policy is not only determined by interest rates, but also by exchange rate interventions and capital controls. China has been gradually allowing more flexibility in its exchange rate and opening up its capital account, but it still faces challenges in balancing its external and internal objectives. While some Chinese citizens may definitely prefer to invest overseas, there are also many who are confident in China's economic prospects and legal system (I tried finding a % but it wasn't readily available). China has been slowly improving its property rights protection and financial regulation, as well as promoting domestic consumption and innovation. So I wouldn't assume that all Chinese investors are fleeing the country or risking their assets - remember we're talking about 1.3 Billion people - most of which do not have the liquidity or means to even be holidaying outside the country. But it is something that I think the CCP would be worried about and hence why they have made some small movements towards rectification. However if it will be enough remains to be seen. We live in interesting times. I'd honestly thought WW III would have broken out by now.
I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds.
I can't find anything definitive. But I expect that's exactly what the Russian foreign reserves were invested in. (Central banks are all pretty conservative and copy each other.)
I personally wouldn't like to predict how safe these assets would be if a war breaks out and the US congress starts passing legislation.
If I were China, I wouldn't take that risk for 1%(?) interest income that these legacy bonds are paying. Now would be a good time to take profits as US bonds have just rallied on mere expectations that rates will be cut in future.
China has been accused of fixing its currency, the renminbi, at an artificially low level for many years. This has given China an unfair advantage in international trade, as it makes its exports cheaper and imports more expensive. However, this policy has also created some structural issues and problems for China's economy, such as:
These structural issues and problems have become more evident and acute in recent years, as China's economy has slowed down and faced increasing external and internal challenges. China has recognized the need to reform its currency policy and address its structural imbalances, but the progress has been slow and uneven. China has allowed more flexibility in its exchange rate since 2005, but it still intervenes to prevent excessive appreciation or depreciation. China has also taken some steps to rebalance its economy towards consumption and services, but it still relies heavily on exports and investment for growth. China has also implemented some measures to liberalize its financial system and reduce its debt burden, but it still maintains tight controls on interest rates and capital flows.
To achieve a more balanced, green, and inclusive growth, China needs to accelerate its reforms and allow its currency to reflect market forces. This would help China to diversify its sources of growth, reduce its dependence on foreign reserves, improve its resource allocation, and enhance its financial stability. It would also benefit the global economy, as it would reduce trade imbalances, ease trade tensions, and foster international cooperation. However, such reforms are not easy to implement, as they entail significant costs and risks in the short term, and face political and social resistance. China will need to carefully calibrate the pace and sequencing of its reforms, and communicate its policy intentions clearly and credibly to the public and the markets.
I have been thinking about this recently. We saw with Russia what happens to a government's 'foreign reserves'. The ECB stole them all and is even discussing given them to Zelensky! China's $3trillion in foreign reserves could easily end up a $3trillion donation to their biggest enemies in Taiwan.
With CBDCs replacing cash, china could easily roll out negative interest rates. Seize people's savings and what are they going to do about it? withdraw it into cash that was just replaced?
I heard that China's entire Domestic housing market was worth $70 trillion.
So even if they sell all their US bond holdings it wouldn't cover much of their housing debt. If their economy starts to see a massive shift away from property ownership the slide would be unstoppable.
Many of the smartest Chinese citizens are investing in overseas markets (where even as a foreigner they likely have MORE protection than if they buy an asset in china). To the Chinese citizen investing in Vancouver, they don't even care about a small decline in house prices - because if they keep the assets in china they are risking 100% of it being seized by the government.
You raise some interesting points, but I think they need some clarification. I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds. China does not need to sell its US bond holdings to cover its housing debt, as most of its debt is domestic and denominated in renminbi. So it's mostly citizens owing money to the government banks. China's housing market is not quite worth $70 trillion, but rather around $52 trillion - however that valuation is itself contentious. China's currency policy is not only determined by interest rates, but also by exchange rate interventions and capital controls. China has been gradually allowing more flexibility in its exchange rate and opening up its capital account, but it still faces challenges in balancing its external and internal objectives. While some Chinese citizens may definitely prefer to invest overseas, there are also many who are confident in China's economic prospects and legal system (I tried finding a % but it wasn't readily available). China has been slowly improving its property rights protection and financial regulation, as well as promoting domestic consumption and innovation. So I wouldn't assume that all Chinese investors are fleeing the country or risking their assets - remember we're talking about 1.3 Billion people - most of which do not have the liquidity or means to even be holidaying outside the country. But it is something that I think the CCP would be worried about and hence why they have made some small movements towards rectification. However if it will be enough remains to be seen. We live in interesting times. I'd honestly thought WW III would have broken out by now.
I can't find anything definitive. But I expect that's exactly what the Russian foreign reserves were invested in. (Central banks are all pretty conservative and copy each other.)
https://www.reuters.com/world/europe/russian-central-bank-reserves-what-are-they-made-2022-02-28/
I personally wouldn't like to predict how safe these assets would be if a war breaks out and the US congress starts passing legislation.
If I were China, I wouldn't take that risk for 1%(?) interest income that these legacy bonds are paying. Now would be a good time to take profits as US bonds have just rallied on mere expectations that rates will be cut in future.