China’s foreign-exchange reserves climbed 18.7 percent to a world-record $2.85 trillion at the end of 2010 from a year earlier and domestic lending exceeded the government’s full-year target. The currency holdings, reported by the central bank on its website today, were bigger than the $2.76 trillion median estimate in a Bloomberg News survey of nine economists.How fast have reserves been built? 26.4% annualized since 1978 (reserves crossed $2 trillion in 2009 and $1 trillion in 2006).
This level of growth will be mathematically impossible to continue at some point (in my view sooner than later). The current $2.85 trillion is a whopping 20% of US GDP and 5% of World GDP, but if growth were to continue at this pace it would grow to 50% of US GDP by 2015 and 125% by 2020 (assuming the US grows at a 5% / year nominal pace).
So what is much more likely in my opinion? In the years to come perhaps a slower growing China, a much stronger Chinese currency, or a less export driven / more internal demand driven China... or perhaps all three.
Source: Chinability
Yep I think you are on to something not addresses in the press yet. Bonds prices have fallen since September in spite of QE2. I've been wondering for a while if this hasn't been due to a shift in demand abroad.
ReplyDeleteWhy would China want to stop at 125% of US GDP?
ReplyDeleteIt looks to me that China has the whole world in the death spiral.
China cannot stop. The point is that demand abroad cannot stay at the same rate. In addition to Chinese demand I'm curious about demand changes from the EU as they deal with their madness.
ReplyDeleteThere have been two prior occasions when a country's reserves hit the 5% of world GDP mark. The US in the late 1920s and Japan in the late 1980s. Hmmm, not particularly hopeful precedents for China.
ReplyDelete"So what is much more likely in my opinion? In the years to come perhaps a slower growing China, a much stronger Chinese currency, or a less export driven / more internal demand driven China... or perhaps all three."
ReplyDeleteOr the value of their paper gets inflated/defaulted away. Your options are the preferable but history suggests that inflation and/or default are often sovereigns' strategies in situations such as these.
One thing is sure. The old saying about what cannot continue not continuing applies in spades here.