The view from the PBOC

From an interview with Yu Yongding, an Oxford-trained economist who sits on the Monetary Policy Committee of the People's Bank of China. Who can doubt that everyone sees the handwriting on the wall? He clearly understands the inevitability of dollar devaluation, the need for Asian countries to dump those dollars, the prisoner's dilemma problem that central banks of China, Taiwan, Japan and Korea have, etc. Barring a disaster in Asia (China invades Taiwan, N-S Korea conflict, etc.), I predict a 2x devaluation of the dollar against E. Asian currencies over the next decade. Sorry that prediction is not precise enough to trade on :-)

(See here for previous posts on Bretton Woods II and dollar devaluation.)

"...in the first stage we must reduce accumulation, then later we should reduce our reserves....[China and Asian countries] don't need that large an amount- more than $2 trillion- of foreign exchange reserves.... This is a very big problem and I think the Chinese government should take some action to reduce the growth rate of the accumulation of foreign exchange reserves as we're still facing the possibility of a big devaluation of the US dollar, so the capital losses will be huge. If that happens, it will be tremendous hit to the Chinese economy."

This is hardly the statement of a gentleman with a benign view toward the US dollar's valuation. It is instead a gentleman, in a position of authority, with a great deal of concern. He went on: "The trouble is, with such a huge amount of foreign exchange reserves, that there is no way to spend it very quickly and there's no plan to sell it of course-- otherwise that inflicts damage on ourselves. You don't want to dump shares when the stock market has not collapsed yet and you are the biggest shareholder." Then, he said "all east Asian countries have tremendous foreign exchange reserves and they all want to get rid of them, but if you do this then you cause competitive devaluation, not of their own currencies, but of the US dollar. So we should do this in an orderly fashion. If Asian countries moved too fast, everyone would lose... It would be utterly unfortunate if Japan sells a proportion [of their reserves, for] that causes problems. Then China panics and China sells a proportion -- it would be very damaging."

The "nicest possibility" for China, Japan and the US to escape this problem was for further "tightening of US monetary policy so that further dramatic devaluation of the US dollar can be stopped. Then, because of the slowdown in the economy, the US current account deficit would reduce and in this way will create conditions for East Asian countries to get off the hook."