Chinese Central Bank in Need of Capital

“It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.” –Chinese Blogger

When it rains, it POURS…

Main Bank of China Is in Need of Capital: “China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.
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For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.

The actual declines in value of the central bank’s various investments are a carefully guarded state secret.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.”

There really isn’t much to say except for, “Uh oh.”

Just like Bill Gross over at Pimco in Big Bet, Big Fail?, the Chinese put their full faith into the credit of the United States Government and bet the entire farm…

BRILLIANT. Just brilliant.