China stamps Australian dollar with reserve currency status

See the latest Australian dollar analysis here:

Macro Afternoon

Here’s something MB missed yesterday (as did the entire Australian press) and may in part have triggered the McKibbin story overnight. From Alphaville:

SYDNEY-Officials within the foreign-exchange arm of China’s central bank recently met Australian regional governments to discuss buying their bonds, people familiar with the matter said. The securities – known as semi-government – are issued by state debt offices in Australia to help fund infrastructure and public spending programs.

The officials from the State Administration of Foreign Exchange, or SAFE, which oversees the allocation of US$3.2 trillion of reserves for the People’s Bank of China, met with funding agencies in New South Wales and Victoria in May, said the people who asked not to be identified. “They are actively interested in the semis market,” said one of the people with direct knowledge of the visit.

SAFE didn’t immediately respond to a request for comment. SAFE is increasingly looking for higher returns on its reserves amid sluggish growth funds held in low yielding assets such as U.S. government bonds. The Wall Street Journal recently reported that SAFE has committed US$500 million to a real-estate fund managed by Blackstone Group LP in search of the better returns. Government bonds, cash and other liquid assets still make up for the bulk of SAFE’s reserves.

As the FT says, ” that’s China thrusting reserve currency status upon Australia”.

Never been a better time to invade New Zealand.

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  1. If this means the AUD is biased higher now then Australia is going to become increasingly imbalanced. Surely retail spending can’t support a country with a decimated manufacturing base?

  2. WSJ also reported on it – i read this very good piece from CS on how the actions of the Swiss are reverberating around the world…

    “…there is an economic need for currency weakness in much of the euro-zone, and some would continue to argue the United States. That leaves a relatively small group of remaining currency’s for money to flow into without resistance, and it guarantees that their value will increase regardless of traditional macroeconomics models or past relationships. This currency effect is already causing some head scratching down-under where lower iron ore prices and expectations of reduced Chinese growth have not resulted in a sharp fall in the value of the Australian Dollar, and in New Zealand where the declining dairy commodity price index has not prompted a sharp move lower in the Kiwi. Similar stories are likely to be present in Canada, Scandinavia and in a few other places that have become currency market favourites.

    This pattern of financial inflows is likely to continue until either the major economies recover to an extent that currency appreciation is no longer problematic for them, or until the recipient countries themselves say no to further gains, and begin to take steps to stop the inflows.”

    Throw Germany, China, Russia and countless other diversifiers into the mix with generic yield hunters and you see why the AUD is now so far out of whack with its traditional drivers.

    • But what happens when the crises in the US, China and Europe blow up? Surely Australia would quickly lose reserve currency status as we are left with much nothing.

      It is almost guaranteed that our government would fall over itself to turn us into Ireland by bailing out our proud banks. Surely then we’d get our weaker dollar, albeit too late.

      So in any case, perhaps we should just enjoy it while it lasts. A last Hoorah! which will allow us to stock up on consumer goods at low prices (provided we buy them online).

    • Yes, I know. but I still don’t buy it. Safe haven no, safe harbour, yes.

      If the Euro came apart, the Aussie would fall, though certainly not as far as it should!

      • I think the main point now from FT and others is the lack of Tier 1 assets. I guess some CB looking for a safe haven think we do, until they don’t.

        The RBA does not have the power of the FED with it’s reserve currency so I only see this as a fleeting dabble by them, but who can say with the EU going down the tubes. I’s love to see a floating asset valuation of the EU CB’s balance sheets; what is all that paper worth now?

    • MineBot, even you can’t be happy to see ore prices falling and the AUD rising. Unless you buy the volumes-offsetting-price-falls fairy tale, I can’t see how this has a happy ending for your masters. Its time to stop the AUD cheerleading!

      I know you’ll have received new instructions when you stop telling us how fabulously cheap our petrol is.

  3. Apart from the yield factor, is this also a reason for bank shares rising almost back to pre GFC levels? as their market value of their fixed interest book is increasing in value.

    • MsSolarFelineAU

      It’s a (and inter-country) joke, lawrence…. *shakes head*

      Australians and New Zealanders have an incredible amount of affection for each other. Hell, some of us are even half-Aussie & half-Kiwi! 😉

      Bloody big phone bills! – that’s a joke lawrence…

      Also, you have just read an example of “Australian sarcasm”.

      • StanGoodvibesMEMBER

        Noodle, we started invading about 20 years ago. I think there are nearly as many Kiwi’s here as there are in NZ. And we’ve infiltrated the very upper echelons of your banking system muhuhuhhahahaha muhuhuhuhuhuhhahahahahahahahahaha

  4. MsSolarFelineAU

    Shouldn’t the AUD be backed by ag & au? Then it would be a “real” Reserve Currency.

    But, on an “individual” basis, our “South Pacific Peso” (I’ve probably offended those who use Pesos) is good to go online & import & overseas shopping with!! 🙂

    • Small problem: we export all our ag and au….

      Which is going to make us look silly when China launches its gold-backed currency, with much of the gold backing it having originally been dug up here!

      • China is world’s largest producer of gold.
        Australia is world’s second largest producer of gold.

        Once the Chinese has all our government bonds, they will then demand all of Australia’s gold.

        That will be the time to launch their gold-backed yuan.

    • Howard/Costello sold 167Tonnes of AU in 1997 at $306oz (US).

      Nationailisation of gold and silver mines? Now trying that would be funny. The reaction from Barrick and Newcrest would be priceless.

      • The ” nationalization” should be in the form of banning gold exports and requiring all gold production to be sold to the government at spot prices. It then goes into a true sovereign wealth fund akin to Norway’s. We then have a chance in the future world monetary order. No chance for the Poms, though, thanks to Gordon Brown.

    • Okay, let’s see:

      Suppose we went to a gold standard back in July 2000. Gold was around $US300/oz, and AU$1.00 was worth around US$0.60. That means AU$1.00 would be backed by 0.002 oz. of gold.

      The price of gold is now around US$1600, which means AU$1.00 would be worth… US$3.20.

      An improvement on our current circumstances?

      • If we go to a gold standard NOW (where does July 2000 come from? Bretton Woods went down Nixon’s toilet in 1971).

        Whats our broad money supply? Say $1.4T that buys 916 million ounces of gold at today’s price (28,490 Metric tonnes).

        Australia actually has 80 Tonnes or 2.57M oz.

        • July 2000 was just an arbitrary starting date. My point is simply that even if it were possible to adopt a gold standard, pinning your exchange rate to an arbitrary commodity has side effects that can be dire.

  5. We should be using our herendously inflated AUD to buy back land, mines and buy really good foreign companies…

    …but will we?

    Will it all go on consumer goods and housing?

    I am concerned…

  6. AUD is playing havoc with markets, as the algos treat it as a risk on / risk off trigger, but the CBs buy it regardless. When the algos get reprogrammed we may see falling risk assets combined with steady or risking AUD. the currency wars rage on.

  7. Does any other old fart remember the “Khemlani Affair”, when PM Whitlam was going to utilise borrowed foreign petro-dollars to buy back the farm?

    Looks like the Chinese do. An intergenerational reverse debt based takeover.

    When you got ’em by the balls……

    I’ll bet someone elses farm on this as I only own debt.

    (Can’t remember if the Khemlani spelling is correct).