While there is a great deal I would like to post about right now I am constrained by a paper deadline that is fast approaching (forget for the moment that it might be the worst paper I have written in years). So, until my plate is clear (approx. next Tuesday) I simply want to point out some developing stories to watch. Once the dust settles I will have lots to say about these stories. So for now….
The Israeli leader who recently forged a centrist party, one thought best positioned to deliver a further Israeli withdrawl and see the creation of a Palestinian state, underwent another surgery following his latest stroke in order to relieve bleeding and swelling in his brain. Most commentators seem to agree that Sharon, if he recovers, will not return to hold public office. This may have enormous implications for the Mid-East peace process, as elections are only 11 weeks away and Kadima (Sharon’s new party) must now scramble for a new leader.
Next month, the Administration will release an updated version of its National Security Strategy, the first since the landmark publication of the policy statement in 2002 which has been widely regarded as the single greatest shift in US policy since Truman and the containment policy of 1947. The release of the NSS will coincide with the Quadrennial Defense Review. Both documents taken together should be quite revealing and I will definitely have something to say about both when they are released. In the meantime, sources have leaked that the current NSS is likely to soften the image of the US projected in the 2002 version–namely, the issue of unilateral and preventive war. This document is rumored to focus more explicitly on the threat of failed states and the remaining networks that facilitate attacks from fundamentalist groups.
Besides all the other points of friction that exist between the US and China at the present moment–Taiwanese security, value of the renminbi or yuan, intellectual property rights, human rights, military modernization–add one more to the list: the possible diversification of China’s foreign reserves.
In a brief statement on its website, the government’s foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.
It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.“We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment.”
However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was “vague”, Thursday’s statement was the first time State Administration of Foreign Exchange (Safe) has publicly indicated a shift away from dollar assets.
“It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,” he said.
The dollar isn’t exactly strong at this moment and given how much we rely on China to finance the massive federal deficit a move to diversify could send ripples (or shockwaves) through the market. As of writing, the dollar is down against the Yen and Euro, taking significant dips since the story was reported. For those who don’t think this is a significant issue I refer you to a similar episode that took place with South Korea last year (see this post for the story). It could be that this move was strategic, a shot across the US bow trying to signal to the US that it should back off or become more flexible on many of the above issues–or at least the ones relating to the economy and finance. In any case it isn’t likely to go away as these types of signals have a way of reverberating through the market.