Stilltitled

If the US government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it’s not the end of the world, it is the end of the current international financial system.

—Yu Yongding, published August 30, 2008, during the closing ceremonies of the Olympics

“Men like Yu Yongding don’t just get up one morning and say this sort of thing. US Treasury Secretary Paulson was put on notice.”

—David Hirst

We are in the same boat, we must cooperate. If there’s no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets…

China is very worried about the safety of its assets. If you want China to keep calm, you must ensure China that its assets are safe.

It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that. China knows what to do. We don’t need your intervention.

Why are we piling up these IOUs if they may default? … This is paper and it may default and it will not increase China’s national welfare.

Our export-growth strategy has run its natural course. We should change course.

—Yu Yongding, a former academic member of the central bank’s monetary policy committee and former adviser to the Chinese central bank in an interview in Beijing on Sept. 23.

Paraphrase of Yu from Bloomberg reporting of the interview

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Treasury Holdings:

• Asia: $2.67t
• Japan: $593b
• China: $519b
  • Export growth has led to the accumulation of $1.81 trillion in FX reserves

“Whether some kind of agreement between them to continue to hold Treasury bills is viable, I’m not sure. It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it’s something to be avoided.”

—James McCormack, head of sovereign ratings at Fitch Ratings, Hong Kong. 

The U.S. financial system was regarded as a model, and we tried our best to copy whatever we could. Suddenly we find our teacher is not that excellent, so the next time when we’re designing our financial system we will use our own mind more.

—Yu Yongding, a former adviser to China’s central bank

Bank run in Asia – Bank of East Asia, a HK bank with $51b in assets

The article continues with thoughts on the potential vulnerability of Eastern Europe, India and South Korea, which are countries and regions that rely heavily on international financing for government funding. Neither South Korea or India will see substantial sums maturing in 2009, though.

“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F- rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

—Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York.

“I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover. My interest is solely for the strength and recovery of the U.S. economy.”

—Bernanke to the Senate Banking Committee on 23 September 2008

U.S. home prices fell 0.6 percent on a seasonally-adjusted basis from June to July, according to OFHEO’s monthly House Price Index. For the 12 months ending in July, U.S. prices fell 5.3 percent, and the cumulative decline since the April 2007 peak is 5.8 percent.

The value of the July 2008 Monthly House Price Index is roughly equivalent to the October 2005 index value

—OFHEO