The People's Bank of China, the mainland's central bank, has begun discussions with the finance ministry on measures to shore up its capital, the New York Times reported, citing people familiar with the discussions.
The bank has bought around $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae (FNM) and Freddie Mac (FRE), and has been on a buying spree in the U.S. over the past seven years, NYT said.
Conversion rates from the dollar to the strong Chinese currency makes the investment value even smaller, the paper said on its Web site.
The bank's capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.
The central bank's predicament has several repercussions, says the New York Times story. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.
The central bank's difficulties do not, by themselves, pose a threat to the economy, economists agree, says the NYT article. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. |
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