Tuesday, March 08, 2005

Thank the Chinese for the Low Mortgage Rates

Interesting article in the New York Times on Asian foreign reserve investing in the US and in particular China.

I have never been able to really understand foreign reserves. Is it real money? Is it funny money? Do you use it just to stabilize your exchange rate? Do you use it to try and invest? This article didn't really answer those questions, but gave me lots of other insight.

Japan's total stockpile of foreign currency, at $817 billion, is still the largest in the world, but China, which now owns about $600 billion, is catching up fast.

As in Japan and China, small groups of civil servants in Taiwan and South Korea are struggling to invest sizable foreign currency reserves of $235 billion and $193 billion, respectively. For years, all four countries have held the bulk of their reserves in the Treasury bills, notes, and bonds that finance the federal budget deficit, leaving American consumers and companies free to spend more on other things and invest their spare cash in more promising ventures.

Together, these Asian institutions are responsible for holding roughly 40 percent of the American government's public debt.
Wow 40% not of foreign holdings but of total holdings. No wonder we are able to rack up big federal deficits and still see low interest rates.
Instead (of Treasury holdings), officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.

The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.
Didn't know that. Wonder if they will start putting "Made in China" tags on the mortgage applications?
In Beijing these days, one of the fastest-growing fortunes the world has ever seen is managed by fewer than two dozen traders, chosen for showing mathematical brilliance at China's top universities.
Why is it that every financial catastrophe always starts with "a few brilliant mathematicians lost a fortune today when an unexpected event ..."?
As he sees it, anything Japan might do to slow its dollar purchases would only create a self-inflicted wound. "If they could move it all out of dollars in one day, I am sure they would do it in an instant," Mr. Koo said. "But if they move 10 percent, and the dollar goes down 20 percent, they are stuck with 90 percent of the portfolio worth 20 percent less."
Sucks to be them.

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