There were some articles a while ago suspecting that Chinese stimulus might actually go into Chinese stock markets, among them is this:
http://www.nakedcapitalism.com/2009/02/so-much-for-stimulus-chinese-loans.html

Now, this is today’s Bloomberg news:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDtidHGVUJpg&refer=home

Would you view this recent Bloomberg article as a confirmation of the former suspicions?

Regards,
Roger Jarema

G. Stephen, most of my comments on the Morici article are above — I think he gets the “plumbing” right but I am not sure he understands the constraints facing China. As for your second question, the PBoC finances its purchases of dollars wholly by creating RMB deposits at the commerical banks. Some of this money creation is then sterilized by the sale of central bank bills, although there is a dispute over how effective this is. It may be that central bank bills are too close a substitute for money to have much sterilization effect.

RE: The Peter Morenci article cited by Lark.
I found this article to be a very clear and accurate discussion of factors that lead up to the current financial crisis. I could find nothing to argue with(Excepting some of his policy recommendations). Other than the policy recommendations, what comments do you and other readers have on this article?

RE: Your response to Void
The accumulation of FX reserves must necessarily be finanaced in some way. Logic tells me it must be some combination of taxes, government borrowing, net cash flow from SOEs, sale of government assets, and creation of money (e. g. printing currency). Are there other sources I have left out? Do you or other readers have an idea of the relative contributions of these various contributions to financing China’s large builup of FX reserves.

There are some points you either completely missed or didnt think that they matter regarding your upper post… which is it?

-The US dollars that china lends the US governement, by buying bonds from institutions with state warranty, mostly go into wages of US american living in the US (assumption). If china were to sell and stop buying those bonds in order to buy commoditys and assets, the value of the us dollar would fall dramaticly compared to those assets and commoditys. And if the seller of those assets and commoditys does not start buying the USD Bonds instead of china, then the US governement will have to find other means to pay their employees, and will probably just print that money–> lower usd value in general

and there will not be extra demand in the us, at most a shift of demand from labour to TRANSFERABLE assets.

though i am not saying all this would be bad for everybody. except the holders of big USD amounts in cash or bonds and unflexible usd wage earners.

CCT, if the RMB value changes against the dollar, that affects not just pricing of goods sold to the US, but pricing of all goods priced in dollars. Of course it also affects the prices of all goods not priced in dollars too. If, for example, $1.00 = E 1.30 = Y 7.00 (where E is euro and Y is RMB), and then the RMB appreciates to $1.00 = Y 6.00, the RMB necessarily also appreciates immediately in Euro terms from E 1.00 = Y 9.10 to E 1.00 = Y 7.80. All Chinese exports to the world would see price rises and all Chinese imports from the world would see price declines.

“Regarding nonenergy trade, no solution is possible without addressing the trade deficit with China, and its manipulated exchange rate and other mercantilist practices. And given the role of the trade deficit in the nation’s macroeconomic problems and sovereignty problems foreign borrowing creates for the United States, no public policy problem is more urgent…

Americans need to recognize that China is hardly a market economy in a Western sense and is still highly state managed. Its financial system may not be able to sustain an unmanaged floating exchange rate; however, China can manage the value of its currency at 4 yuan to the US dollar as easily as it does 6.8 to the dollar. In fact, it would be a lot easier to manage a value closer to balance of payments equilibrium.

Simply, the United States should give China the opportunity, with a hard deadline, to manage down its trade surplus with the United States, either through meaningful and complete currency revaluation – complete means raising the dollar value for the yuan to a level that reduces China’s trade surplus with the United States by one third each year and to zero after three – or through other domestic means of Beijing’s choosing.

If China declines, the United States should simply tax dollar-yuan conversion in proportion to its official and surrogate currency market interventions. The United States should impose a tax equal to the quarterly value of China’s intervention divided by its exports of goods and services. China would then have a strong incentive to reduce and then stop intervening.

If China does not reduce and eliminate intervention and chooses for the United States to tax currency conversion, then the benefits from a revalued yuan of higher prices for Chinese imports that should go to Chinese businesses would instead go into the US Treasury. If China reduces and then eliminates one-way intervention and lets its currency rise to a value that balances trade, Chinese businesses would capture those benefits in the form of higher dollar prices for their goods.

…

Redressing the trade deficit with China in this manner would not be protectionist. China’s actions now are protectionist, and constitute a modern day Smoot-Hawley. China’s policies are about as protectionist and predatory as could ever be conceived by the most skilled 17th century mercantilist and are an absolute threat to US prosperity and sovereignty.

I am not advocating protectionism – let China stop rigging its currency and trade and the United States can and should compete. I am advocating the United States abandon a policy of appeasement in commerce and embrace self-defense and self preservation.”