The Once Mighty

This Economist article gives a lucid analysis of the current situation China now finds herself in:-

“The bind they're in is an impossible one. If China (and other dollar holders) do not adjust their currencies, they can expect no relief from the inflation that's recently attacked their economies. At the same time, continued depreciation of the RMB against the Euro may soon anger European nations, which are beginning to absorb many of the Chinese imports once destined for American shores.

If China and other dollar-heavy nations do allow for adjustments, even minor ones, then the dollar could plummet, instantly slashing the value of their foreign exchange portfolios. Neither option is particularly appealing.”

The article also mentions the OPEC members making noises about the downsides of pricing oil in dollars (and their failure to shift their massive dollar reserves into other-currency denominated assets). It says that China premier Wen Jiabao seemed truly unnerved in a speech given on November 19, in which he talked about the "big pressure" weighing on China's massive foreign exchange reserves.

Brad Setser at RGE Monitor is quoted as saying he suspects that China's state -- counting the assets of the State Administration of Foreign Exchange, the China investment corporation, China's big state banks and the national social security fund -- hold around $1.2 trillion in fairly long-term dollar-denominated debt.

The article cites William Buiter at the Financial Times that if the dollar falls by another twenty or thirty percent, which is certainly possible, the Chinese and Japanese authorities would each be presenting their tax payers with a further $200bn to $300bn capital loss.

That is not at all a pretty picture. It certainly brings to mind the prospect of the Hong Kong Exchange Fund’s US dollar assets and their value depreciation implications. What’s more troubling is the inflationary impact on Hong Kong consumer prices as a result of the persistently weak US dollar, to which the Hong Kong dollar is pegged. One only wonders if Hong Kong officials are having concerns similar to those of premier Wen.