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Friday, September 5, 2008

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.

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.


Anonymous said...

I don't understand this 200 aircraft carrier thing. A modern carrier costs 3B each. that would mean China gave us $600B???????

Please someone help me with this. Could this be the F&F bond thing?

Anonymous said...

Can someone explain the agenda of calling it "brilliant?" I understand the math, I just don't see how that will affect the future.

peterthepainter said...

i think it's called irony!

the futur is not what it was!

our banks is bust, their banks is bust

Anonymous said...

I think it's all BS!
The central banks around the world are in the game together.

Anonymous said...

New LEH rumor to save the day! KKR and BX to buy LEH assets (term used loosely.)

Anonymous said...

Let me see if I can help here.

China basically loaned us money to buy their goods. But they loaned us $2 so that we could buy their $1 apples.

The thinking is that they will make money on the interest on the loan...right.

Everytime the "money" changes hands from bank-to-bank, each step adds a bit of interest to the overall "loan".

So the US goes looking for some Credit...and China offers it to us..and we used bonds/treasuries as collateral (i.e. to guarentee the payment)...that are heavily weighted with Fred/Fannies bonds.

Peter has it right. All the banks are tied into eachother and each one is wanting to protect its own interest. But in doing so, if they cause the "web" to collapse, everyone loses.

So China is now calling Ben and Paul and saying "hey, you guys better make sure our investments don't go bust, otherwise we have to dump the $1T in debt you have with us".

What happens when banks have to write off bad debt??? Bear/Sterns..

What happens when COUNTRIES have to write off bad debt to eachother? Scary times...