Friday 16 February 2007

China's surplus - what to do with it?

In economics there is a constant debate on the US deficit and the Chinese surplus. Can this go on forever? What does a deficit really mean.

One problem, often written about, is that the Chinese currency is too weak relative to the dollar. One thing that prevents a correction is that China uses its vast surplus (obtained from exporting to the world) to buy up US and European government bonds (and thus supporting the US dollar).

It is interesting to read therefore that:

China to select riskier investments
16 February 2007
The central bank said China's stash of $1.07 trillion in foreign currency and securities will likely be invested in new ways rather than only in US and European government bonds, the Wall Street Journal reported. China, one of the biggest investors in the world, has announced that its old system of investment is out of date and it will follow the lead of countries like Japan, Singapore, and South Korea. New steps would mean fewer steady purchases of US Treasury bonds and more investments that are riskier but have better long-term returns, like corporate bonds, stocks or even real estate and commodities. Analysts suggest China could spare $200 billion - $300 billion from its reserves for more aggressive investments in the coming years.

This is a potentially important move - the ramifications might be widespread.

1 comment:

Anonymous said...

One scenario is that China decides to float its currency, buy more Euros and sell the Dollars it has. This will be the biggest Economic Tsunami in History.

What are the chances that this happens? and if yes, when?