[lbo-talk] Narnia, China, Letters of Credit

Doug Henwood dhenwood at panix.com
Mon Mar 14 06:42:23 PST 2005


Daniel Davies wrote:


>On China, I really think we need to step on the Nouriel Roubini et al argument
>that China has to do this that or the other because of the danger of
>a "capital
>loss equal to 9% of GDP" on their US dollar holdings. This would be a purely
>notional mark-to-market loss. The Chinese US investments, post a devaluation,
>would buy roughly the same amount of US assets, goods and services that they
>would have bought before. They would buy fewer Chinese goods and
>services, but
>this would just be a formal recognition of the already existing fact that
>China's current trade surplus is an amount of money which could not
>possibly be
>spent or reinvested in the Chinese economy. The Chinese government might do
>all sorts of things, but to suppose that they are worried about the annual P&L
>of their reserves management account is, in my view, wrong.

Yeah. I just read the Roubini/Setser paper last night <http://www.stern.nyu.edu/globalmacro/BW2-Unraveling-Roubini-Setser.pdf> and, while I found a lot of the stuff about the unsustainability of the US-Chinese relation persuasive, I didn't get why valuation losses on reserves was such a big deal. It's like money that fell from the sky - what's the crisis of losing 30% of it?

But it is a psychological fact that people will shun a depreciating asset, isn't it? Nothing encourages the buyers of financial assets like rising prices!

Doug



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