Sunday, March 04, 2007

China's (missing) FX reserves: a case of pay me later?

Brad Setser's blog, which I highly recommend, has focussed on, inter alia, China's missing FX reserves. His take, that China's reserve growth is actually higher than reported, may not be entirely correct, to the extent that the following is true.

According to Asia Times: Although the exact amount of overdue accounts receivable overseas is not known, Han Jiaping, director of the credit-management department under the research institute of the Ministry of Commerce, estimated that China has about $100 billion of accounts receivable overseas and the figure is growing by $15 billion a year.

In other words, China's missing FX reserves may not be as much a function of undercounting as under collection. What is better than paying for goods with newly printed currency or bonds? Not paying at all.

While US$100B may not be the sum is used to be, it ain't chicken feed, and as an owner of chickens I know the difference.

I wonder if we are nearing the end game of China's willingness and ability to service America's consumer needs. At some point, the lack of payment for goods received leaves the goods providers unable to continue to provide.

Further, and perhaps more interesting for those of us long the precious metals, bringing the account current would mean a substantial increase, given that there is a multiplier effect yet to be applied to the unpaid $100B, in global liquidity yet to be seen.

Seems to me like a damned if you do, damned if you don't scenario.

How big a fuse does one need to ignite the derivatives Neutron Bomb? perhaps $100B will suffice. We will see.