This NYT article discussing the reaction to the losses that it has suffered on dollar denominated holdings implies that the people running China's central bank had no idea what they were doing. The article implies that the bank was surprised by the fact that they lost money on these holding. If this is true, it is truly incredible that a major economic power would allow such inept people to run its central bank. It is almost inconceivable that anyone who followed economic data did not realize that the dollar would decline from the level it has reached in 2001 and 2002. The United States had a large and growing trade deficit. It was throwing hundreds of billions of dollars into international currency markets every year for which there was no obvious demand. It was understandable that China's central bank might buy up dollars in a conscious effort to keep the dollar high and thereby sustain its export market to the United States. This would mean that China was effectively paying people in the United States to buy its exports. This would be a reasonable growth strategy if China for some reason lacked the capability to generate this demand internally. (Otherwise it would make more sense for China to pay its own people to buy its goods rather than people in the United States.) However, it would be bizarre if China's central bank bought up dollar denominated assets in the last 7-8 years thinking that they were making a good investment. It is difficult to understand how they thought they would make money on their dollar holdings. Apart from buying bonds from Zimbabwe, it's hard to imagine how they could have made a worse investment. If the people who run China's central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.
--Dean Baker
