Official data from the People’s Bank of China shows the reduction of reserves to $3.18 trillion for the final quarter of 2011. This is a 0.6% negative growth rate for the last quarter of the year and the weakest quarterly data since Spring of 2009.
It should come as no surprise that manufacturing output is coming under pressure as the artificial consumer demand driven by market manipulation, excessive credit, and foreclosure moratoriums is coming to an end. WTF Finance explained the reasons for the artificial stock market rebound and the return to excessive consumerism in our article “Why Investing In US Stocks or Treasuries Is A Bad Idea”.
Reuters reports on the potential consequences to the Chinese Economy and anticipated monetary policy changes:
“The decline in foreign exchange reserves in Q4 is consistent with the sharp reversal in capital flows out of emerging markets in general and the region in particular,” said Andy Ji, an economist at Commonwealth Bank of Australia in Singapore.
“The People’s Bank of China is likely to engage in more cuts in the reserve requirement ratio (RRR) and aggressive liquidity injection through open market operations if the trend deteriorates further,” he said.
“Bank of America-Merrill Lynch Economist Ting Lu expects a trend of sinking surpluses to retard capital flow into China, necessitating a policy response to keep economic conditions as stable as possible ahead of a change in the country’s top political leadership anticipated in late 2012.
“The drop in foreign currency inflow will have significant implications for China’s monetary policy, but limited impact on liquidity conditions if policymakers are flexible in using monetary tools,” Lu said, adding that he expects more reserve requirement cuts.”
The reality is that the Chinese are operating with budget surpluses and over a trillion dollars of China’s currency reserves are invested in US Treasuries. Absent of those Chinese investments, the United States will have a difficult time deficit spending at its usual rate without experiencing significant consequences for its irresponsible behavior.
Chinese President Hu Jintao on several occasions expressed concern over the irresponsible financial policies of the United States and its addiction to deficit spending. The entire Obama Administration travelled to China over the years to blatantly lie that the US would get its financial house in order while at home big government policies continued as usual. Vice President Joe Biden, Treasury Secretary Geithner, Secretary of State Clinton, and President Obama all attempted to convince the Chinese that the United States has its financial affairs in order while supporting costly big government policies, continuous deficit spending, and increases in the debt ceiling.
With the Chinese manufacturing sector slowly losing momentum, China will start having to rely on its own consumers to replace foreign demand for its products. Reduction in reserve holdings and increased consumerism by the Chinese people will reduce the outflow of capital. As the Chinese Economy slowly becomes more self-reliable, the Chinese people will experience an increase in their standard of living while the United States will have to adjust and no longer rely on China’s savings and its productivity.
With China no longer buying US Treasuries, there will be a collapse in the real demand for US Debt. The Federal Reserve can create artificial demand and participate in the Treasury Auctions as it already has done with its $600 Billion Bond Purchase Program, but the World Economy is under no obligation to prop up the irresponsible United States and its artificial economy. China diversifying away from US Treasuries with monetary policies that increase lending and consumption within its own demographic will result in a strong, self-sustainable Chinese Economy and new economic world power while the consumer based US Economy that lacks production and is built on artificial credit will finally be exposed and collapse.
The ultimate collapse of the US Economy is by no means the fault of China. The coming economic demise of the United States can be directly attributed to its fiscal, economic, and monetary policies. By abusing its monetary system with inflationary policies, the US ignorantly enjoyed a lifestyle it cannot afford. As the era of the US Dollar as World Reserve Currency nears its end, the true US Economy will be exposed as artificial and unsustainable.