China Seeks to Lessen Its Reliance on US$ Through Aggressive Acquisition of Real Assets

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

Financial Times
China to deploy foreign reserves
By Jamil Anderlini in Beijing
July 21 2009 19:09

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.

Mr. Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“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.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

The Fed's Currency Swaps

Some controversy was triggered over a line of questioning this morning during Ben Bernanke's testimony before Congress, as reported on top financial blog sites Zerohedge and Naked Capitalism. We read them both daily and are often envious of the depth and breadth of their expertise.

Congressman Grayson's line of questioning implied that the Fed was providing loans to foreign companies. Others wondered if the Fed was engaged in propping up the dollar by forcing central banks to buy US dollars in these swaps.

During the current credit crisis the Fed first reacted to market conditions and requests from central banks starting in September 2008 by expanding its currency swap lines with the European Central Bank and the Swiss National Bank, and creating new swaps with the Bank of Japan, Bank of England and the Bank of Canada for $180 billion.

What Is a Currency Swap?

A currency swap is a transaction where two parties exchange an agreed amount of two currencies while at the same time agreeing to unwind the currency exchange at a future date.

The currency swap is executed at a given exchange rate, generally the market rate, in order to provide liquidity in a specific currency to a specific banking jurisdiction. Here is an example of a swap that was conducted with the BOE at the rate of 1.8173.



The reason for the swap is to provide the BOE with additional US dollars to meet the short term needs of its client banks, and the dollar demands of their customers.



In September private banks were reluctant to lend to one another or engage in private swaps because of a prevailing fear in the market of potential bank insolvencies and the counter party risk which that entails.

At the same time there was a 'run' on dollar assets in Europe as customers sought to liquidate their investments, denominated in US dollars, but held by foreign banks. Some of these investments ironically enough were collateralized debt obligations that had been sold by Wall Street. TED Spread Soars to New Record - Symptom of the Eurodollar Squeeze?



Did Wall Street set up their foreign counterparts, and then squeeze them mercilessly when they needed dollar assets? Probably giving the Street too much credit for planning. It is more likely a case of simple misrepresentation, followed by fear when the misrepresentation had been discovered.

The Ted Spread is the difference between the US Dollar LIBOR and the 3 Month US T Bill. It intends to measure the difference in 'price' between dollars in the US and dollars overseas. Nine out of ten people might notice a sharp spike in this spread as the credit crisis hit full fury in September 2008. Demystifying the TED Spread



As one can easily see, the TED Spread began to decline after the Fed and the Central Banks began to provide dollar liquidity where it was required.

There is concern amongst some people that the Fed was engaging in these currency swaps to prop the dollar, as expressed in the US Dollar Index (Dx).

There was no need to do these swaps to support the dollar, as the US dollar was already enjoying a strengthening as the 'flight to safety' currency. The original September tranche created by the Fed grew to 500 billion dollar swaps line as the Central Banks sought to prevent a currency crisis, an artificial dollar shortage in what amounted to a run on foreign banks for dollar holdings, as the credit crunch hit with its full fury.



The DX index is a somewhat imperfect gauge of the dollar value as it is heavily weighted to the Euro and Yen, and has a no exposure to some of the most important developing industrial powers.

More importantly, here is the Euro - Dollar Exchange Rate. Again, the 'jitters' over the state of the European Banking System were causing a steep decline early on and a flight to safety in the US Dollar. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks



Ben Bernanke is no Alan Greenspan in that his deportment in front of Congress is rarely calm, but I did not find any particular 'tells' in his responses to Mr. Grayson beyond his usual skittishness and unease in the public spotlight.

Quite frankly, my initial take was that Ben was incredulous that the Congressman was asking such naive questions, particularly when the congressman started asking about the source of the Fed's authority to conduct foreign exchange operations.

Personally I wondered if it was a 'red herring' served up by a friendly Democrat. There are much more penetrating questions to be asked of Mr. Bernanke and his Fed, and these are not among them. Ron Paul is much closer to the mark than Congressman Grayson.

The concern about the swaps seemed a bit misplaced and confused. But the obvious opacity of the Fed and its operations does underscore the political naïveté in promoting the Federal Reserve as the uber regulator of the system.

One must wonder who is so politically tone deaf on the President's economic staff? Or is Larry Summers really that arrogant to think that he can be the next Fed chief and chairman of the SEC all rolled into one? Considering Larry's past performances, the answer may very well be yes.

Postscript: The emails show that there are those who observe, somewhat correctly, that if the Fed had done nothing to alleviate the eurodollar short squeeze then the dollar would have most likely appreciated in value, perhaps moreso than it had done.

The proponents of this solution do overlook the problem that the private markets for overnight loans had utterly seized, and to not provide central bank liquidity in this situation would have most likely have caused a cascade of significant failures, and a backlash from the rest of the world that would have been equally impressive.

There is the substantial issue, raised rather stridently by some of the central banks, that it was the US financial institutions and ratings agencies that had caused the problem in the first place by selling large amounts of fraudulent assets to trusting private bankers around the world. You know, those funny foreign folks who the US, as a net debtor with debt load growing mightily, is going to continue to ask to buy its debt and financial instruments now and for the forseeable future, and continue to support the dollar as a reserve currency.

Is Change Coming to Japan?

It will be good news for Japan indeed if the opposition Democratic Party in Japan can win their August 30 elections.

The LDP has been in power since 1955!

Can you imagine what kind of corporatocracy the US would have if the Republicans had won every election since Eisenhower? This is what exists today in Japan.

There is an embedded bureaucracy in the Japanese Ministry of International Trade and Industry that is formidable, and that will resist policy change. So there is room for pessimism.

And the election is far from won. Do they use voting machines in Japan?


Bloomberg
Aso Dissolves Japan’s Parliament, Admits Failings
By Sachiko Sakamaki and Takashi Hirokawa

July 21 (Bloomberg) -- Prime Minister Taro Aso dissolved Japan’s parliament, clearing the way for an Aug. 30 election that polls indicate will hand power to the opposition Democratic Party of Japan for the first time.

Lower-House Speaker Yohei Kono announced the dissolution in parliament today to a chorus of cheers. Aso’s ruling Liberal Democratic Party, in power for all but 10 months since 1955, will defend a two-thirds majority in the election.

“The era of one-party dominance is over,” said Gerald Curtis, professor of Japanese politics at Columbia University in New York. “This is the first election since the LDP was formed when just about everybody believes that the chance for a change of the party in power is very real.”

The DPJ plans to encourage consumer spending by providing as much as 5.3 trillion yen ($56 billion) in child support, eliminating road tolls and lowering gasoline taxes. The party also aims to shift tax money from public works spending to strengthen social security, DPJ legislator Tetsuro Fukuyama said in a July 14 interview.

“They are going to increase the purchasing power of the people directly and they are going to fund this by cutting out wasteful spending,” said Jesper Koll, Tokyo-based chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. “That’s a good, sensible economic policy to have.”

Poll Lead

Forty-two percent of respondents in an Asahi newspaper poll published yesterday said they would vote for the DPJ, compared with 19 percent for the LDP. The opposition, which has controlled the less-powerful upper house since 2007, had a public approval rating of 31 percent, compared with 20 percent for the LDP, according to the poll.

Aso, who came to office last September, has resisted calls from within his own party to resign before the election. His administration has been plagued by cabinet scandals and a deepening economic recession.

“I’m sorry my unnecessary remarks damaged credibility in politics,” said Aso in today’s televised press briefing. Since taking power, he has said doctors lack common sense and mothers need discipline more than their children, angering both groups. “I also apologize the LDP’s lack of unity” created public mistrust.

Aso, 68, pledged to revive the world’s second largest economy and improve the financial security of voters with free pre-schools and higher wages for part-time workers....