The Gold Standard  

If any one who follows more closely than Brad Setser, US trade deficits, its financing, global central banks’ reserves accumulation and sovereign wealth funds, then I am yet to find that person. This post by Brad Setser on the open announcement by China of its decision to put its reserves to use to fund overseas acquisition by China State-owned enterprises is a good read.

If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals. [More here].

One of the interesting links in his post is this TIME article. I missed it. It is an  important development, if true  and if sustained. It removes one of the key pillars of support for China’s mercantilist exchange rate policy which are foreign-owned exporting firms operating out of China. Their outsourcing model had made it imperative for China to maintain currency competitiveness. So, they were a powerful lobby against change in China’s exchange rate policy. In some sense, they were pursuing their rational self-interest but clearly it did not enhance systemic welfare globally (Adam Smith repudiated here?). See my piece in MINT here that briefly touches upon this issue. More background is available from James Kynge’s wonderful book, ‘China shakes the world’. A ‘must-read’ for understanding China’s modern economic history.

From Brad Setser:

Meanwhile, corporations are paying much closer attention to the risks and hidden costs of supplying their home markets with stuff made thousands of miles away in China. None of this necessarily means an end to the extraordinarily co-dependent economic relationship that China and the U.S. in particular have built up over the past decade. But it does mean big changes.

On one side, you had autocrats who feared losing their grip on power if the economy didn’t keep growing; on the other were autocrats who feared losing their grip on power if profits didn’t keep growing. They had a lot in common.  [More here]