China Seeks to Reduce Its Exposure to Dollar Assets

Japan and India are already on this trend.

Is this a little nag from China ahead of next week's FOMC meeting?

Don't they realize that the Bankers' motto is 'what does not kill them makes us stronger' to paraphrase Nietzsche?

China may cut its dollar holdings
China Daily
2008-09-12 07:32

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world's biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms' debt, CICC Chief Economist Ha Jiming said in a report Thursday.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."

China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

Countries in Asia have stockpiled foreign exchange reserves since the 1997-98 financial crisis to act as a cushion against a run on their exchange rates. That in turn has increased pressure on policymakers to ensure higher returns from more than $4 trillion in assets.

China will expand its investments in corporate bonds and equities, according to Ha. Treasury and agency bonds account for 50 percent and 40 percent of total dollar assets held by the central bank, he wrote.

Why the Sudden Imperative to Promote a Deal for Lehman?

Three possibilities.

As suspected, customers are pulling their business, putting Lehman into a death spiral that will not wait until a major asset sale in October. Even the pressure from the Fed to maintain credit lines cannot generate business revenue, and that pressure becomes more difficult to maintain as the need for the lines increases. Once the death spiral starts it takes more than rumours to stop it.

Its also very possible that someone forced the Fed's and Treasury's hand. If one is in negotiations for a sale where price is a serious stumbling block in talks that have been going for many weeks, why set an artificial deadline for a firm deal that is only days way?

It appears that the price of the deal was deteriorating, so it would look like a seller was forcing the issue with a kamikaze negotiating maneuver. The plummeting stock price causes top employees to start leaving, and besides working capital the prime asset of an investment bank is its people.

Or it could be a potential buyer who feels they have nothing to lose trying to force Hank to throw down on a sweetener, threatening to take down either a subsidized deal or deliver a serious hit to the US financial system. Is Lehman speaking seriously with any non-US banks especially the Canary Wharf crowd? Would they-who-must-not-be-named do their own guy Hank this way? Hard to think Ken Lewis would play this card but who can say?

Hardball dealing no matter how one looks at it, but what else would be expected from the 'sell your mother for an eighth' crowd?

Can you imagine what will happen to the financial sector if Monday arrives and there is no tangible backing from the Treasury and no indication of a deal?

Postscript: The insightful and ebullient Yves Smith at Naked Capitalism proffers the idea that a more politically palatable backstop might be crafted through the FHLB. That is worth watching if a deal is announced.


Fortune
Lehman in the red zone
By Roddy Boyd
September 11, 2008: 6:56 PM EDT

...Meanwhile, long-time Lehman customers at four high-profile hedge funds told FORTUNE that they have sharply curtailed their trading with the firm.

One general partner at a $4 billion bond fund said that he is only doing trades that settle "next-day," or overnight, and now has no longer term counter-party risk with Lehman.

Customers' refusing to engage in longer-term derivative trades, if it becomes a trend, is problematic indeed for Lehman since derivative contracts are one of the last high-margin areas of trading. The profits from trading most bonds are measured in basis points and commissions from stock trading are pennies per share.

Among Lehman's many problems is the threat of possible multi-step ratings downgrades from the three major ratings agencies -- and all that entails for the costs of a financing-driven, narrow-margin business.

The fear among traders is best expressed in the rising price of Lehman credit default swaps. Traders at hedge funds and rival investment banks have pushed the price of insuring a $10 million block of Lehman debt to extremely high levels...

Central Banking Joke

Ben Bernanke, Alan Greenspan, and Jean-Claude Trichet are in the duck blind and a bird flies overhead.

Bernanke looks at it and says, "Looks like a duck, flies like a duck... it's probably a duck," shoots at it but misses and the bird flies away.

The next bird flies overhead, and Monsieur Trichet looks at it, then looks through the pages of a bird manual, and says, "Hmmmm...green wings, yellow bill, quacking sound...might be a duck." He raises his gun to shoot it, but the bird is long gone.

A third bird flies over. Greenspan raises his gun and shoots suddenly, brings it down, and turns and says, "Can someone go see if that was a duck?"