Are the Chinese losing from their dollar holdings, the dollar weakness?

Found two articles addressing the matter, one from the WSJ’s Deal Journal and the other from NYT, courtesy of Floyd Norris.

Let’s begin with the Journal. So the dollar has been plunging against major currencies for the past few months, after it has strengthened against the same group in February when the crisis was still far from where we are at the moment. That’s point 1. Point 2 is, the Chinese hold around 70% of their reserves in dollars.  In that case, worries have been going around that the Chinese are losing/about to lose a big part of their reserves from this greenback devaluation.  Sure, the reserves have grown to $2.27 trillion but if the dollar continues to decline in value, aren’t the Chinese in a whole lot of trouble?

Some did a back-of-the-envelope calculation that “China is losing four aircraft carriers” every percentage point appreciation against the dollar, according to an article from Sohu.com, a major Chinese news portal.

Others went further to speculate, “it is an intentional espionage to weaken Chinese buying power,” says an independent scholar Wu Fei in his Sina.com blog. The post continued, “Over the years, the US has been exchanging its dollars for Chinese goods.” As a result, Americans now have all the goods and Chinese have all the greenbacks, Wu said. As the dollar weakens, the dollar value that China has made throughout all the years shrunk.

Some bloggers raised the idea of just moving China’s investments in the safer (and in some cases, more volatile) asset classes. Gold, oil, other kinds of commodities. But from Norris’ article from the Times, he seems to be saying, you know what, there’s not much the Chinese should be worried about.

There is renewed talk about the weak dollar. But don’t believe it.

Where it really counts, the dollar is not moving at all.

In February, the dollar hit a high against most currencies amid fears of worldwide recession and a desire for the safety of American investments. It was then worth 80 euro cents, and 6.82 Chinese renminbi.

This week, as the dollar neared 67 euro cents, it was still worth 6.82 renminbi.

The reason for this is simple, and obvious. China pegs its currency to the United States dollar.

With the peg, then China’s dollars shouldn’t really be causing Wen Jiabao and the gang to get sleepless nights, should it? If the yuan’s pegged to the greenback, then however the dollar loses value, it shouldn’t matter much, should it? Whatever the dollars are worth now would still be worth the same 1, 3, 5 years from now, if the peg persists. Then again, Norris points out what is perhaps the bigger issue here:

But while China pursues its peg, the world’s largest exporter will keep exporting and taking in cash rather than imports. The values of the major international currencies will fluctuate against each other, but the inherently stabilizing impact of changing currency values will be limited.

One lesson of the credit boom in the United States was that things that are unsustainable will eventually stop, perhaps abruptly and in highly disruptive ways. The same may yet be said of China’s peg.

Then I go back to my previous post. China’s reckoning moment, anyone?

Sources: Deal Journal, NYT, aquities

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