China Is Running Out Of Money
Gordon G. Chang
Forbes.com
8/12/2012
Last week’s release of disappointing economic and trade data for July has, predictably, renewed calls for additional stimulus. In May, Beijing ramped up its support for the economy, and observers had expected activity to pick up by last month.
Why has the economy so far failed to respond? There are various reasons, but perhaps the most important is that the country is running out of money for stimulus.
At first glance, that proposition seems preposterous. After all, the People’s Bank of China, the central bank, held $3.24 trillion of foreign currency reserves at the end of the first half of this year. Yet foreign currency, no matter how plentiful, has limited usefulness in a local currency crisis. In any event, the PBOC’s foreign currency holdings are almost evenly matched with renminbi-denominated liabilities that were incurred to acquire all those dollars, pounds, euros, and yen. As a result, the central bank cannot use the reserves without driving itself deep—actually, deeper—into insolvency.
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