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Analysis: the Ultimate Power of Printing Money

12-18 12:05 Caijing Magazine

Instead of building up more currency reserves, China should encourage others to stockpile the yuan.

By Lu Lei, special researcher for Caijing

From Caijing magazine

 

One interesting emerging phenomenon is that the country in the eye of financial storm, the United States, has become a safe haven, while the U.S.’ creditors - including China - have to fight on multiple fronts: the pressure of domestic economic slowdown and the shrinking value of foreign reserves.

 

China is now and will continue to bail out the United States as a big holder of its government debt. There really is no other choice. If China stops buying dollar debt, a sharp depreciation of the U.S. dollar will cut into the value of China’s huge, existing reserves. If China continues to buy, the United States can just keep printing bonds or money, and in the mid-term China’s reserves will shrink also.

 

The key to the dilemma is not about issuing bonds, but printing money. Nobody cares about debt issued by Iceland because the country doesn’t print an international reserve currency - therefore its bankruptcy is not a concern for most of the world.

 

The world’s financial markets look to China for a helping hand and China should consider what it wants in return. For paying the price of the shrinking value of its reserves, China should ask the international financial markets for the ultimate power: currency emission. Whoever wants to tap China’s reserve should pay in yuan. In that case, countries would build up a certain amount of yuan-denominated reserves or issue debt denominated in yuan.

 

If foreign institutions can buy U.S. dollars from China, the U.S. government might not need to print as much money and can reduce inflationary risks, and China doesn’t have to worry so much about dollar depreciation and the resulting shrink in the value of its reserves. Moreover, China can move from a passive to an active role in determining the world-wide bailout scheme.

 

Printing money is the ultimate power in the financial crisis and the key to shaping the post-crisis currency landscape. If China misses this chance, it might end up repeating Japan’s mistake which led to a lost-decade with an over reliance on currency depreciation.

 

China can forget about bottom fishing business opportunities and postpone plans to stock resources at low prices - now is the time to acquire and retain the power to print money. If China doesn’t get it, maybe the best option is the middle-road, slowing down the purchase of U.S. dollars.

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