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Is China's Central Bank Run By Morons?
This NYT article discussing the reaction to the losses that it has suffered on dollar denominated holdings implies that the people running China's central bank had no idea what they were doing. The article implies that the bank was surprised by the fact that they lost money on these holding. If this is true, it is truly incredible that a major economic power would allow such inept people to run its central bank.
It is almost inconceivable that anyone who followed economic data did not realize that the dollar would decline from the level it has reached in 2001 and 2002. The United States had a large and growing trade deficit. It was throwing hundreds of billions of dollars into international currency markets every year for which there was no obvious demand.
It was understandable that China's central bank might buy up dollars in a conscious effort to keep the dollar high and thereby sustain its export market to the United States. This would mean that China was effectively paying people in the United States to buy its exports. This would be a reasonable growth strategy if China for some reason lacked the capability to generate this demand internally. (Otherwise it would make more sense for China to pay its own people to buy its goods rather than people in the United States.)
However, it would be bizarre if China's central bank bought up dollar denominated assets in the last 7-8 years thinking that they were making a good investment. It is difficult to understand how they thought they would make money on their dollar holdings. Apart from buying bonds from Zimbabwe, it's hard to imagine how they could have made a worse investment.
If the people who run China's central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.
--Dean Baker
COMMENTS (9)
"it is truly incredible that a major economic power would allow such inept people to run its central bank," you say in jest.
But here in the United States, having apparently inept people at the helm has been par for the course.
Perhaps that is how the Times could make such an assumption about the leaders of China's central bank. Of course, as you point out, in that case the NYT should have changed their headline.
Posted by: David Reese | September 4, 2008 11:53 PM
Look at Goldman Sachs for your answer.
Posted by: Charleston Voice | September 5, 2008 10:23 AM
"This would mean that China was effectively paying people in the United States to buy its exports."
There is a lot of money involved in this, and more attention should be paid in the media to just which people are or will be getting the money. Certainly executives and (hopefully) stockholders of companies which outsource their labor or which import goods from China are benefitting; and workers who lose their jobs because of the China trade are not.
Posted by: skeptonomist | September 5, 2008 3:48 PM
workers who lose their jobs because of the China trade are not.
So they don't benefit from lower interest rates caused by Chinese buying of Treasuries, and they don't benefit from manufactured goods that are cheaper than they would otherwise have been because China held down it's currency?
Posted by: Anon | September 5, 2008 4:21 PM
A company who is selling running shoes, for example, that cost them, say, 20 $ when made in China instead of, say, 50 $ when made in USA, will it sale them to USA customers 30 $ less ?
In other words, for whom will they be cheaper? And how much cheaper?
That is the question.
Posted by: Gerry Flaychy | September 5, 2008 9:41 PM
Yes, the point of outsourcing labor to save money on production is to try and gain a competitive price advantage, while still maintaining some sort of profit margin.
The poster above doesn't seem to understand the concept of competition. We live in a capitalist economy, not a command one in which production is monopolized and prices set.
As a capitalist, the answer to the last question "how much cheaper" is that the price will be set to be whatever the market will bear. I would also suggest to the poster above to go into a a department store and check out the men's shirt department. I am amazed to find that I can buy decent shirts for less money than I paid 30 years ago, and mind you, it is less in nominal terms, using currency that is much less valuable than in 1978. In other words - REALLY cheap.
Posted by: George Fiala | September 5, 2008 11:30 PM
To George Fiala.
In a car dealer's store who sell cars of the same company, all made in the same country, there are cars with prices different from each others, so we can say that some are cheaper than others. This is a question of quality, size, options, in wich town the store is situated, etc...
The same with shirts. Some are cheaper than others, even if they all come from the same country, even from the same manufacture. The question is, if we take a particular shirt, with a particular size, etc..., that we already sell on the market a certain price, say 25 $ for the ones already made in USA, and we, the selling company, ask a manufaturer in China to make us a cost price for this particuliar shirt, and the one in China is making us a price 10 $ less than the one in USA, shipping to our facilities included, will we continue to sell this particular shirt at the market price of 25 $, or less than 25 $?
And if less, how much? For example, will we keep 5 $ for us, and let our customers benefit the other 5 $?
That is the question.
Posted by: Gerry Flaychy | September 6, 2008 10:18 AM
Are they morons? Yes, but that's not really unusual. We elect morons to office right here in the US. One might think that democracy would produce more capable leaders. But that doesn't seem to be the case. Maybe if our voters weren't morons, we'd get better results.
Posted by: fostert | September 7, 2008 3:34 PM
You must remember that corruption in China is institutionalised to a level you cannot even comprehend. A job is given or sold based on one's relationships, friendships, or family standing. Even a school teacher must often buy her job in China. Ability is not important for this "job for life", just who you know. Incompetence runs rampant in China at all levels and is visible at all levels. The country survives despite, rather than because, of themselves. It is one huge juggernaut that keeps rolling along even though the driver doesn't know how to drive.
Posted by: mac | November 3, 2009 2:29 AM