"The recent liquidity
crunch, and its cause, illustrates some of the difficulties China's economy
will face in the future. Over the last two years, and especially in 2013,
mainland corporations with offshore affiliates had been borrowing money abroad,
faking trade invoices to import the money disguised as export revenues, and
profitably relending it as Chinese yuan. As China receives more dollars from
exports and foreign investment than it spends on imports and Chinese investment
abroad, the People's Bank of China, the central bank, is forced to buy those
excess dollars to maintain the value of the yuan. It does this by borrowing
yuan in the domestic markets. But because its borrowing cost is greater than
the return it receives when it invests those dollars in low-earning U.S.
Treasury bonds, the central bank loses money as its reserves expand."
Authored by Michael Pettis, originally posted at Foreign Policy.
Authored by Michael Pettis, originally posted at Foreign Policy.
