China

Interesting article in the Financial Times. Might be nothing, but…

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

The statements were made in Beijing in Chinese, so it is reasonable to assume they were primarily intended for a domestic audience.

Here is a sample of reactions from around the econoblogosphere.

Jansen:

The FT has an article which details comments by the Chinese premier in which he states that some of the country’s pile of dollars will be used to assist corporations in making non China acquisitions.

The US budget deficit will be prodigious over the next decade and the loss of any dollars from the pool available to fund our domestic spending spree is a troubling prospect.

WSJ economics blog:

The sheer size of the reserves does give a daunting impression of China’s financial firepower. As Eswar Prasad and Isaac Sorkin note in a new piece for the Brookings Institution, $2 trillion is equivalent to:

  • all the land and property in New York City, Los Angeles and Boston
  • 73% of the market capitalization of the Dow Jones Industrial Average at the end of June
  • 25% percent of the market capitalization of the S&P 500 at the end of June

Here is a rule of thumb. Whenever you think “China” and “capital flows”, think “Brad Setser“.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad. See Richard McGregor’s account of how Chinalco financed its initial purchase of Rio Tinto shares.

Just a couple more links.

First, this is one of the scenarios the iTulip guy has worried about for a while.

Second, The Onion has done its best work since the 2000 election: “Well, I’ve Sold The Paper To The Chinese”. The entire issue is brilliant.

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