According to reports corroborated by Bloomberg News Services and the Financial Times, an air of confrontation was evident at the annual summit of the Asian Development Bank. A heated verbal clash between the U.S. delegation and the Chinese representatives nearly caused an abrupt halt to productive discussions. Timothy Adams, the Under Secretary for International Affairs, was bemoaning the fact that the Chinese were not allowing their currency to rise in value. As those of you who follow this sort of thing may understand, this is viewed as the great panacea for the U.S. trade deficit. A rising Chinese yuan would make Chinese goods more expensive worldwide.
The corollary would be an increase in the consumption of dollar priced goods. This in turn would improve the U.S. competitive trade position and stimulate our export market. The Chinese vice minister of finance Li Yong said he recently “heard rumors that the U.S. dollar might depreciate by 25%”. He further suggested that this would negate the need for any action on China’s part. Increasing the value of China’s currency would represent a serious threat to China’s position as a leading manufacturer for the world. All indications are that the Chinese are hunkering down for a protracted confrontation over currency values. Further evidence can be found in the German economic magazine Handelsblatt.
In early May this publication quoted Chinese central bankers as describing plans to increase their gold reserves from the current 600 tons to 2,500 tons using their burgeoning cache of U.S. dollars to facilitate this transaction. Tan Yaling, of the Bank of China, is quoted as saying that a sharp increase of gold reserves would be needed, “to be prepared for emergency situations, as an example due to international political and economic turbulences.” In either a remarkable coincidence, or part of a concerted effort, note that the Chinese Ministry of Land and Resources are announcing plans to set up strategic national reserves for all the basic minerals used in China’s manufacturing complex.
The U.S maintains a similar strategic reserve comprised mostly of the ferrous and non ferrous metals. These minerals include silver, gold, manganese, chromium, iron ore, copper, aluminum and potassium. The Ministry of Land and Resources noted that maintaining these mineral reserves is a necessity for China, in “… coping with emergencies, and guaranteeing the security of resource supplies.”