Will China correct this imbalance by allowing the RMB to appreciate? Or will it dump dollars onto forex markets?
As we watch the slow-motion dissolution of the Greek and Spanish banking systems, and possibly the euro zone itself, tremors are being felt elsewhere in the global financial system.
For example, the FT Alphaville blog has a post on the emerging dollar shortage in China, where capital outflows are growing at a time when capital inflows are drying up.
China is stuck with “a huge pile of Treasuries it can’t openly liquidate for fear of sending the wrong signal to the Treasury market, as well as fear of moving the underlying.” Yet, at the same time China is finding it harder to absorb more dollars – like it has in the past – because fewer dollars are flowing into the country.
