Quote of the day: China hopping mad about GSEs

At the end of last week, the warning came. The Chinese officially warned Hank Paulson et al. that they better get their act together on Fannie and Freddie. The Chinese own a ton of GSE paper and they would be hopping mad to see their investments lose value.


The implicit threat is that the Chinese will cut the dollar loose if Fannie and Freddie fail. If the dollar falls precipitously against China’s currency, then all bets are off regarding the future course of the U.S. economy and inflation. That said, it remains to be seen whether the Chinese would make good on their threat as it would cause problems for the China and its export market as well.

In the end, the comments highlight how excessive pending by the U.S. has led to the relative weakness in geopolitics. But, so it is when one depends on the kindness of foreign governments.

“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to questions yesterday. “If it is not the end of the world, it is the end of the current international financial system.”
Yu Yongding, former adviser to China’s Central Bank

3 Comments
  1. pej says

    yeps. I mentioned this a few days ago here http://www.bloomberg.com/apps/news?pid=20601080&sid=aslo2E01QVFI&refer=asia

    But more importantly, it seems like china would try to prop up it's economy by intervening on the Forex markets to prop up the USD?
    http://realitylenses.blogspot.com/2008/08/us-dollar-rebound-results-from-chinese.html

  2. Edward Harrison says

    Yves Smith over at naked capitalism noticed that monetary authorities were actually discussing intervening on the dollar:

    http://www.nakedcapitalism.com/2008/08/nikkei-eu-japan-us-discussed.html

    But, these are all floating rate currencies. Your article about the Chinese intervention is interesting because I do believe we will see some busted pegs at some point in Asia or the middle east.

    It also is clear that the Chinese can hold US treasuries and GSE paper using the same arms-length proxies.

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