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China's currency reserves can only buy 10 years of Chinese oil imports if China does not try to use them to buy large amounts of oil ... if it were to do so, the value of the US dollar would crash, and with it would go the crude-oil purchasing power of its foreign exchange reserves.

Those foreign exchange reserves are not savings, they are a side-effect of policies to discount the yuan/renminbi. And that is the real key to the extra degree of freedom that the Chinese have in facing an oil price shock ... since they are forcing the buying power of their currency down now, they are free to permit the value of their currency to rise if they find that the benefits of a cheap yuan policy are outweighed by the problems caused by energy price inflation.

Its not easy trying to find a capability for response to changing conditions in configurations of values in the various external accounts and publicly available trade figures, because those are values from the systems operating under current conditions, and two economies could well function in a very similar way under current conditions, but still have quite different capacities to cope with a particular kind of financial stress.

Now, one good measure of one particular vulnerability to an oil price shock is foreign debt denominated in terms of foreign currency ... this was what hammered the Brazilians in the first oil price crisis.

But as far as a general measure ... I'd have to cogitate on that. Plus also read what other people are saying, of course ... the more grist for the mill, the better it works.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 27th, 2008 at 07:50:33 PM EST
[ Parent ]
China's currency reserves can only buy 10 years of Chinese oil imports if China does not try to use them to buy large amounts of oil ... if it were to do so, the value of the US dollar would crash, and with it would go the crude-oil purchasing power of its foreign exchange reserves.

Now here's an interesting question. Suppose China wants to continue increasing their energy use at a few percent per year, using its currency reserves if necessary. How fast and how high and in how much time would the price of oil go, and who else would be deprived of that oil given that global supply has peakedis in an undulating plateau?

What data do I need for that? Total energy use (or domestic production) as well as imports, but how about the demand elasticity of the oil price?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed May 28th, 2008 at 02:27:32 AM EST
[ Parent ]
Simply slowing down its accumulation of currency reserves will increase the value of the yuan at a moderate pace.

But its a balancing act, because allowing the value of the yuan to rise too far, too fast will undermine the position of Chinese exporters in overseas markets and cut into China's current account surplus, and China requires those exports in order to purchase a wide range of commodity inputs ... not just oil, but iron ore, natural gas, coal, aluminum, concrete, etc., etc.

"Spending its foreign exchange reserves" is reasoning as if foreign exchange reserves are a dragon's treasure in a cave, somewhere. That is, as if the FX reserves are something that is intrinsically valuable in its own right, as opposed to a standing future monetary claim on future international income flows.

"Spending from Foreign Currency Reserves" implies a massive change in China's FXR policy ... that is, something like a doubling of value of the (indirect) FXR of the yuan/renminbi, going on a rough, back of the envelope reckoning that the yuan/renminbi is at something like 1/4 of its purchasing power parity value, and if it were to operate under a dirty float it would be more like 1/2 of its PPP value.

You are using "spending a bit out of FXR" as if it is an incremental change from the current FX rate policy stance, when the incremental change is to ease up on the steep discount of the yuan renminbi by not accumulating Foreign Exchange reserves at quite the same rate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 28th, 2008 at 01:48:02 PM EST
[ Parent ]
My grasp of the national accounts is small to nonexistent. I guess what you're trying to say is that the trade balance is a better comparison variable than currency reserves.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Thu May 29th, 2008 at 04:08:13 AM EST
[ Parent ]

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