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On March 2, 2007, Brazzil magazine published the original article of this
series of articles about Brazil and China: "Here Is Why Brazil Should Adopt the
New Asian Currency." As a follow up to that article about the growing economic
connection between both countries, we have a new four-part series of articles.
In part 1 we discuss China's foreign exchange reserves, and the creation of China's new Sovereign Wealth Fund, the new Chinese government investment agency. We also discuss some of the reasons why Brazil should adopt the new Asian currency and how Brazil will go about achieving that goal.
In part 2 we discuss the actual plan for the China/Brazil investment process, and the distinct areas for these investments.
In part 3 we give the reasons and justify why it is imperative that China makes these investments in Brazil.
In part 4 we discuss a new paradigm for direct investment between two countries - in this case investments from China into Brazil. We also give the reasons why this plan provides the best way to accomplish this innovative way to invest a country's extra monetary reserves. And finally the conclusion regarding why it's imperative that China make these investments in Brazil ASAP.
China's Foreign Exchange Reserves
On January 15, 2007, the People's Bank of China announced that China's foreign reserves had reached US$ 1.07 trillion at the end of 2006. During 2007 China should receive a fresh increase of around US$ 500 billion to be added to its foreign exchange reserves. Approximately 80% of Beijing's foreign exchange reserves are held in U.S. denominated assets.
As of the end of 2006 China was holding over US$ 850 billion in assets, and during 2007 that amount should increase by another US$ 400 billion - to a new adjusted total of US$ 1.2 trillion.
In the first quarter of 2007 alone China saw its foreign exchange reserves increase by US$ 136 billion to a total of US$ 1.2 trillion and in the second quarter the reserves increased by US$ 131 billion to a new total of US$ 1.3 trillion. By the end of 2007 China should have approximately US$ 1.6 trillion in total foreign exchange reserves. But it is estimated that China does not need more than half that amount to be able to protect their currency in case of an international monetary crisis.
That means that China will have about US$ 800 billion to be used for domestic investments, and also to diversify into other currencies such as the yen and the Brazilian real. Chinese diversification of several hundred billion dollars into yen, and the Brazilian real would promote the long-term Chinese national interests and it would be a smart way of securing strategic resources such as securing a reliable source of food supply (Brazil) and new technology (Brazil and Japan.)
The Chinese have been expressing their opinions on Chinese Internet message boards, and they have criticized the government for helping U.S. taxpayers and homeowners by investing hundreds of billions of dollars in U.S. Treasury bonds and mortgage-backed securities, instead of spending the money at home in infrastructure and social programs.
China's New Sovereign Wealth Fund
In early March 2007, China's Finance Minister Jin Renqing confirmed reports about China's plan to set up a specialized agency to invest a portion of the country's hefty foreign exchange reserves. Jin said the State Council had decided to divide the country's foreign exchange reserves into two parts: "normal" reserves and money to be used for investment seeking "more profits."
On March 9, 2007 Bloomberg News reported that Lou Jiwei, promoted to deputy secretary of China's cabinet, will head a new government agency to manage part of the nation's currency reserves, a central bank adviser said.
...China's new investment company should focus more on securing strategic resources and technology, and not on the financial markets," said Zhong Wei, director of Finance Research Center of Beijing Normal University.
China is setting up a new investment agency to seek higher returns on its foreign currency reserves - when these investments are made the new agency will take in consideration its risk factors, and the long-term efficiency of management and the results of investments' returns.
I would suggest to Mr. Lou Jiwei, the new investment manager of China's new investment agency, that China should consider investing up to US$ 200 billion of China's pool of investment money in Brazil.
To keep competitive in the global economy Brazil needs to invest more than US$ 500 billion in its economic infrastructure over the next ten years - and almost half that amount could be supplied as long-term loans from the Chinese government.
China is seeking to invest its reserves more effectively to support its long-term economic growth, and China's new investment company will focus more on securing strategic resources around the world - and there is no better investment for China than investing in Brazil to achieve their goal of securing long-term strategic resources.
The Chinese Central Bank would have to sell over a period of time some of those dollars that they are holding today as part of their foreign currency reserves to be able to buy the Brazilian currency, the real, when they decide to invest their money in various Brazilian projects.
But when they start buying so many Brazilian reais over a certain period of time, by selling the current held by the China's Central Bank, that currency transaction would affect the value of both currencies; the value of the Brazilian real would go up in relation to the US dollar. I am aware that this large inflow of long-term Chinese investments into Brazil would affect the value of the Brazilian currency in turn making Brazilian exports more expensive in world markets in terms of US dollars.
As the inflow of this Chinese money affects the value of both currencies - when the value of the real reaches a 1:1 ratio against the US dollar - at that point the value of the real should lock in its value against a basket of currencies including the currencies that will make the new Asian currency (such as the euro) including the currencies of China, Japan, and South Korea.
And from then on the real (Brazilian currency) would fluctuate in global markets according to this new set up until the new Asian currency goes on line and Brazil adopts the new Asian currency right from the date when they launch the new Asian currency.
That strategy would also help prevent Brazil and China from incurring any currency losses regarding China's long-term investment in Brazil.
Brazil and the New Asian Currency
When my last article - "Here Is Why Brazil Should Adopt the New Asian Currency" - was published on March 2, 2007, a number of people wrote directly to me and they also posted their comments on the web following the article. It became obvious to me that a number of people think that it is impossible for Brazil to adopt the new Asian currency. You can read the article at: http://www.brazzil.com/content/view/9821
One reader said: "But if you are talking about Brazil not having total power over its own currency, adopting a currency from elsewhere, that's impossible."
Regarding the Euro
Many of these readers have that kind of reaction to my article, because of their nationalistic feelings, and also because they don't understand the benefits of adopting such a strategy when a country becomes a full member of a new monetary system such as the European Monetary Union and they adopt a new currency such as the euro.
I would suggest that the readers who want to understand a little better why such leading countries as France and Germany decided to adopted the euro - they should read the book "The European Dream" by Jeremy Rifkin. He does a superb job of describing the journey that started in 1951, and all the steps that it took to bring the European Union and the European Monetary Union up to the advanced system that they have today.
In January of 1999 the euro was born, and out of the 15 countries that comprised the European Union (EU), 11 countries also belonged to the new European Monetary Union (EMU). The (EMU) country members adopted the new currency - the euro, as of January 1, 1999. At that time the resulting euro market created an economy with more than US$ 6 trillion in gross domestic product (GDP).
The members of the Executive Board of the European Central Bank (ECB) are not there to represent their countries of origin. They are there to provide stability to the euro and they look at Euroland as a whole when making their policy. The euro is a monetary arrangement, and its monetary policy will be adopted independent of political control from its members.
This way of operating keeps the politicians out of the decision-making process and reduces the risk of them playing their political games with the country's monetary and currency systems.
Regarding the New Asian Currency
I am a firm believer that if the economic policies adopted by the new Asian Monetary Authorities - a new Asian Central Bank (ACB) - are good enough for such a diversified group of countries such as China, Japan, and South Korea; then such policies also will be good for Brazil. The Brazilian economy will be better off in the long run under the new Asian currency system than under the fragile, weak, and old Brazilian currency system.
Abandoning a fragile and weak national currency such as the real in favor of a stronger international currency such as the new Asian currency would eliminate currency and maturity mismatches, because debts would be denominated in the same unit as a company's cash flow. It would also allow Brazil to take out long-term loans for all kinds of economic purposes.
The adoption of the new Asian currency by Brazil would bring about safety and stability for capital mobility. Long-term interest rates would decline and become less volatile - as we have seen happening in Europe over the years, under the euro system where interest rates have gone down in Ireland, Italy, Portugal and Spain - making it easier to cut budget deficits and promote growth.
In the Last 20 Years
The other major loss to Brazil is the human capital loss. There were a large number of well educated Brazilians who were moving out of Brazil in their search for a better future (according to "Veja" magazine article published on July 18, 2001, over 2 million Brazilians live outside Brazil).
This outflow of human capital would have had a negative long-term impact on the future economy of the country, but today globalization has turned these people into assets for Brazil - Brazilian moving assets scattered around the world.
Ricardo C. Amaral is a writer and economist. He can be reached at
brazilamaral@yahoo.com.
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