HIDE THE CHINA!

5/27/10

The Dow was up almost 300 points today, mostly, according to the experts, on news that China denies talk that it is reevaluating its exposure to euro-denominated assets.

The cynic might come up with two responses, and, if one is looking for cynicism, one has come to the right place, so here goes:

First, what alternative do the Chinese have to holding a certain amount of their assets in euro-denominated instruments? They could pile more heavily into the dollar, but how attractive is such an alternative, especially given the recent well deserved lectures they have given to various culprits in the Bush/Obama administration about their debasement of the dollar? I suppose the Chinese could go more heavily into yen denominated assets and, given the performance of the yen of late, perhaps that would have been a well advised move in the short run. However, Japan has long term problems, not the least of which, for holders of its currency, is that the stronger the yen gets, ceteris paribus (“all other things being equal” in the language of the saints and scholars), the less attractive the underlying assets become. There’s always gold, of course, and those who have held large positions in gold (including yours truly, in a relative sense) would very much like the Chinese to increase their positions in that ancient object of royal desire (gold, not Zsa Zsa Gabor), but, if you can believe the Chinese, they seem to like earning interest too much to get heavily involved in gold.

But speaking of believing the Chinese leads to the second and more cogent point: if you were an official of either the Chinese treasury or central bank and you were considering lightening up on the euro, would you tell everyone you were doing so? I guess one could concoct some sort of Sun Tzuian scenario in which the Chinese would talk down the euro in order to bolster the relative value of the dollar, of which they hold plenty more. But that is a bit far-fetched. Simply put, the Chinese are smart enough to apply their seemingly culturally imbued inscrutability to their currency dealings and they realize that they are big enough and (rightly) perceived to be wise enough to have profound impacts on the values of their holdings simply by their utterances.

Like everyone else, I have no idea what China is really doing with its euro holdings in real time, just as nobody had any idea what it was doing with its dollar holdings when things were (?) getting dicey for the greenback. But I would be very hesitant to use the pronouncements of various Chinese financial and monetary officials as a guide in determining the current Chinese attitude toward anything. Lest this be interpreted as some kind of knock on the Chinese, I would apply the same skepticism toward the pronouncements of the financial and monetary authorities in any country, perhaps especially those in this country. I only focus on the Chinese in this post for three reasons:

--The are in today’s news.

--They are very large in everything (currency holdings, population, growth rates, etc.)

--They are very smart, especially relative to the estimables in the Bush/Obama administration.