Sunday, March 3, 2013

Savings, Production and Net Exports: Part IV

According to noted Peking University finance professor, Michael Pettis, the People's Bank of China is tasked with purchasing all available US dollars.  The PBoC essentially converts exported domestic production, sold for largely in fiat US dollars, back into local currency for local use.  It is one of repurchasing exports at the cost of foreign exchange, no matter how much they look like questionably sustainable commodity purchases.

The PBoC attempts to control the consumption rate with a foreign exchange policy, that has over the past 30 years since the open door policies of Den Xiaoping, largely given incentive to export surplus domestic demand.
The Chinese-US exchange rate with annotations.
Because such economic policy is commodity intensive, especially energy, the pace of exportation may force China into policy-induced inflation, if it is not there already.  With a looming rise in unemployment, China  must focus attention toward its social welfare system, which has been eroded since the the start of the Open Door policy - which may explain the high saving rate in China.

It reasons that China must increase its consumption rate to maintain employment levels in a world which no longer seems  capable of purchasing its surplus demand.

China's export heavy economy may experience declining production, and declining employment levels as a result, as governments, households, and businesses in Europe and the US impose austere measures on their balance sheets.

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