Wednesday, April 8, 2009

Economics - China and the reserve currency.

Hmm... Probably not the best entry to start with, 200 lines of Python code. It's just I'd only seen this code as fragments on the web and had never seen it pieced together and integrated into a GUI.

I commented on a blog entry here talking about China's push for a reserve currency.

I've edited it a little for clarity.

I’m not really sure the Chinese could really see this financial crisis coming. If they could then they certainly would not have parked massive reserves in the dollar nor their disastrous investment in Morgan Stanley and Blackstone.

As for the crisis not affecting China’s economy - I think it is to early to declare that. There is a large lag between import/export declines and direct effects on the economy. World-wide logistic chains take a while to unravel.

6.5% growth forecast in China next year sounds impressive, but is actually considered a catastrophe in China (re: protect 8, ie preserve 8% growth), this forecast is likely to be revised downwards as well, unlikely to go negative, but in a country of 1.2bn people with a dubious social contract with the people (don’t do anything political and we’ll provide the growth) it is a recipe for combustion. If China really does escape this crisis unscathed, then it is likely just saving up problems in their banking system for the future.

As for the new reserve currency - this is just China grandstanding to get a place at the table. The chances of it getting off the ground are zero. And commodity linked currencies would be a disaster, plus whom would guarantee the currency? The USD is the reserve currency because it is the largest economy with a massive and liquid trade in dollars. If China was serious about a new reserve currency then it should concentrate on opening up its own currency - as the third largest economy in the world it could form a bipolar reserve currency with the US. But it would not do that because the China government (rightly) fears massive currency movements overseas and is still chastened by 1997.