Thursday, September 25, 2008

Is the bailout for China?

A RUMOUR: Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis. [1] There's talk that Chinese authorities have since denied this claim.

China is worried about the default risk on its loans to the US. The nation is also losing on the principal value of its borrowings to the US because of the steady revaluation of the Yuan. (This revaluation has been done, whether justified or not, as a result of pressure from the US).

The Paulson plan is expected to inject $700 billion into (private) banks. This financial capital is then expected to be used by (for profit) banks to create up to 14 trillion dollars credit to buy the quantity of extra treasuries that will go onto the market. I don't see why a nationalised bank can't perform this function?

Some leading financial authorities in China want the Asian nations to agree to refrain from panic selling of US treasury securities in order to prevent a free-fall in their value. Such an agreement is unlikely given the history of wars and antagonism between the various nations.

Whatever the outcome of this immediate saga it is almost certain (IMHO) that China's 'export-growth strategy' will come to an end. That will be a day for the forests and planet earth to celebrate!


1 comment:

Jimbo said...

This is entirely plausible. One, Paulsen has been absurdly vague about why $700 billion as opposed to any other particular number. Leaving aside the stick a finger in the air random approach, it could be that this figure relates to a level needed to assure foreign potential buyers of Treasury securities that they should continue to prop up the U.S. economy (although the methodology that gets you to this number is still unknown). The other reason for giving credence to this rumor is that Paulsen, as head of Goldman Sachs, has had a long relationship with the Chinese, since reinforced when he became Treasury Secretary. You just know he has been on the phone with them a lot lately.

Who would have thought, the anti-Communist GOP ends up with a quasi-Socialist economic policy and dependent upon "Communist" China. We live in a bizarre world.

And, as an environmental economist who works a lot in SE Asia, yes, the end of China's export boom, if that actually happens and doesn't just get displaced to other Asia, Africa and Latin America, will be a belated relief on carbon emissions (though much of the damage has already been done and we're inevitably going to experience some serious "climate adaptation").