The economic crisis that the global economy is facing nowadays has started with the financial crisis of the U.S financial system. We are talking about an unprecedented speculative boom at global level which has overcome the previous booms created by the deconomic crisis, exchange rate, metal reserves

Rujan Ovidiu

Tartavulea Ramona Iulia

English

Research Papers in Economics

245 
 
ABOUT THE ECONOMIC CRISIS 
 
Rujan Ovidiu  
Academia  de  Studii  Economice  Bucure ti  Facultatea  de  Rela ii  Economice  Interna ionale 
ovrujan@yahoo.com, ovidiu.rujan@ase.ro 0746181444 
Tartavulea Ramona  
Academia  de  Studii  Economice  Bucure ti  Facultatea  de  Rela ii  Economice  Interna ionale 
ramona.tartavulea@yahoo.com 0721154828 
 
The economic crisis that the global economy is facing nowadays has started with the financial crisis of the 
U.S financial system. We are talking about an unprecedented speculative bubble at global level which has 
overcome the previous bubbles, created by the dotcoms  or the pyramidal games  (such  as Caritas) at 
national or regional level. 
The financial crisis, apparently caused by deficient risk management, is a null sum game, in which the 
wealth  gains  are  made  private  and  loses  are  socialized.  The  epicenter  is  the  U.S,  where  favorable 
conditions are created to facilitate the real estate credit (a home for each family); institutions to guarantee 
these credits where created by the state and the interest rate was reduced a lot. The main vector for 
triggering the crisis was the credit default swap created by JP Morgan.   
 
Keywords: economic crisis, exchange rate, metal reserves 
Cod JEL: F5, G1 
 
The economic crisis that the global economy is facing nowadays has started with the financial 
crisis of the U.S financial system. We are talking about an unprecedented speculative boom at 
global level which has overcome the previous booms created by the dotcoms or the pyramidal 
games (such as Caritas) at national or regional level. 
The financial crisis, apparently caused by deficient risk management, is a null sum game, in 
which the wealth gains become private and loses are socialized. The epicenter is the U.S, where 
favorable conditions  are  created to  facilitate the  real  estate  credit (a home  for  each family); 
institutions to guarantee these credits where created by the state and the interest rate was reduced 
a lot. 
An important wheel in the market economy is the one connecting the capital price with the 
interest rate: the decrease of interest rate determines the capital price to increase (inclusive the 
real estates). The increase in real estate prices has encouraged the mortgage credit, and so the 
bubble started to enlarge by issuing financial instruments which proved to be harmful. 
The financial derivatives are titles bounded to a financial instrument, merchandise or indicator, 
with the purpose of negotiating financial risks on the financial markets. 
The mortgage credits (and afterwards other credits too) were over secured, and the financial titles 
issued this way and guaranteed by assets (ABS  - asset-backed security or MBS  - mortgage-
backed security) have highly increased and spread widely. They promised high earnings and 
appeared to have a low risk degree. A lot of banks, investment societies and pension funds have 
made large investments in such financial products. 
As the interest rate in the US (and other countries) has increased and the price of real estate has 
decreased,  the  speculative  bubble  has deflated. The  weight  of toxic  assets in  the  balance  of 
financial institutions was so high, that many of them have gone bankrupt. The lack of faith 
between banks has led to stagnation of crediting, inclusive of the production crediting and so the 
crisis has affected the real economy. 
The decrease of production (by closing some unities, shortening the working hours) has led to 
decrease in the incomes and in the demand. The demand for imports is decreasing more than the 
one for local products, so that countries with a large weight of export in production are more 
affected by this diminishing of demand than others. 246 
 
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SUA Germania China Japonia
2008 export percentage in total %  2000-2008  yearly changes % 
Fig 1. The main exporting countries
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The world trade is decreasing. In crisis conditions, if the demand decreases, the prices decrease 
too, also the international prices and the relation between currencies change. 
The most important world exporting countries are: Germany, China, USA and Japan (Figure 1) 
 
 
Figure 1: The main exporting countries 
Source: WTO, World Trade 2008, Prospects for 2009, Press/554 
 
After many decades of USA being the largest world exporter, in the last years Germany has taken 
the lead, and China has taken the place of Japan (3), and most recently it became the second 
world largest exporter, outrunning The United States. 
For the large exporters, the US represents one of the most important selling markets. USA is 
today the world largest importer. The diminishing of the US demand for import, as a result of the 
crisis, has affected strongly Germany, China and Japan. All of these countries have searched a 
solution to compensate the decrease of extern demand (especially from USA) for their products 
by stimulating intern demand for consumption and investments.  
As the world import has decreased, the prices for the primary commodities which are traded 
widely have also decreased (Figure 2).  
 
Figure 2: The primary commodity price index in world trade – monthly average figures Jan 
1992-march 2009 (2005=100) 
 247 
 
Source:  IMF Database, April 2009 
The most spectacular decrease of commodity prices has occurred in the summer of 2008. 
The most important commodity products are metals and oil, and their prices have followed the 
group trend, having a harsh evolution.  
The  price  for  oil  has  also  decreased,  more  than  the  metal.  As  the  commodity  prices  have 
decreased in the USA, China and other countries, the idea of investing in the so called “hard 
assets” has appeared. 
Theoretically, from shares you get dividends, from loans you get interest and from real estate you 
get rent. The holding of raw materials implies expenses (stocking costs, depositing costs), and 
doesn’t offer any direct payments. So why would anyone invest in raw materials?  Just like the 
other assets, these are subjected to price fluctuations. The fluctuations depend on the demand in 
the industry and the storage capacities. If we look at the evolution of these prices in the past 15-
25 years, we observe that the current price is higher than a few years before, but is seems to be 
getting more stabile. Anyway, increases in price at the level of the first semester of 2008 are 
unlikely, so the possession of commodity stocks doesn’t appear to be the optimum investment. If 
the United States has great capacities for oil storing
116, that means that China should increase the 
ones it has, which implies great investments. So it would make more sense for China to invest in 
transforming the coal (which is a plentiful resource for them) into gas.      
A complicated issue in the process of adjusting the financial economy to the level of the real one 
is tied to dollar value, as an international currency, in connection to other currencies. In the last 
years the dollar exchange rate has decreased, mainly because of the chronic deficit of the US 
trade balance and budget. 
The  decrease  in  comparison  with  SDR  was  not  spectacular,  because  the  dollar  has  a  big 
percentage in the SDR basket, but has been spectacular in comparison with the euro (figure 3) 
and the renminbi (figure 4). We cannot predict the future evolution of the dollar in comparison 
with other currencies. 
From the year 1995 to 2000 the exchange rate of the dollar in SDR has increased with 25%, and 
then it reversed, decreasing with 30%.  
 
Figure 3: the Euro-dollar exchange rate 
         
Source: IMF Database, March 2009, Der Spiegel apr.2009 
 
We  observe  that  the  dollar  exchange  rate  has  decreased  with  85%  from  2001  to  2008,  and 
increased with 20% in the second half of 2008. 
                                                       
116 The oil reserves in USA and China are modest. The largest reserves, in 2007, were in Saudi Arabia – 
264,2 mrd. Barrels, Canada – 180 mrd. Barrels, Iran– 138,4 mrd. Barrels etc. (Handelsblatt, 21.04.2009) 248 
 
The Chinese currency has been in an almost fixed exchange rate to the dollar until June 2005, 
then it increased its value by 30% until June 2008 and since then the exchange rate is relatively 
constant. After June 2005, the renminbi-dolar exchange rate is similar to the euro-dollar one.  
 
Figure 8: The Renmibi to Dollar exchange rate 
 
Source: People's Bank of China, Statistics, 1999 - 2009 
China holds large dollar reserves because of the great US deficits in trade balance with China.
 117  
 
China’s strategy: trading reserves for resources 
Considering that China had large deposits of longer-dated US Treasuries, The Central Bank had 
to react at the global crisis situation by elaborating a strategy to decrease exposure to the dollar, 
which affected the stability of its national reserves.   
The  first  step  that  The  Central  Chinese  Bank  did  was  to  divest  itself  of  longer-dated  US 
Treasuries in favour of shorter-dated ones. 
Another idea was to buy strategic resources, which prices have decreased because of the financial 
crisis, with two benefits at once: helping the Central Bank to decrease exposure to the dollar, 
holding  hard  assets  with  chances  to  make  greater  profit  (because  of  their  decreased  current 
prices). We can say that from a geopolitical view China appears as a strategic player on the world 
scene, seeking to gain a favorable position considering the present global crisis.    
On a large view, we can say that China’s strategy and its actions in the recent global context 
might have major implications over the dollar’s evolution, the American economy and over the 
international financial system. That why it is so interesting to find out which is China’s strategy, 
how it will be implemented and how it will affect the other economic and politic actors.  
Officially, China’s reserves are of $1,95 trillion.  Regarding the composition of these reserves, 
according to the most recent Treasury International Capital  (TIC) report, China has holdings of 
US Treasuries of $696 billion, but it seems like the amount is likely to be bigger than that figure, 
since some of the purchases of Treasuries made by the UK and Hong Kong should actually be 
attributed to  China’s  Central  Bank.  China also  holds  US  government-sponsored  agency  debt 
(Fannie Mae and Freddie Mac paper). 
On the other hand, the assets holdings of FED have highly increased in the past months, because 
the purpose of the US Treasury to recover the American financial system, but the percentage of 
best assets (AAA) was reduced to a quarter of the total, in comparison to three quarters last year. 
Taking in consideration the increased risk aversion of international investors, there are more and 
more buyers for the US Treasuries, which offer increased safety at lower profit margins. So, that 
takes significant pressure off of China to soak up the new issuance of US debt.     
                                                       
117 We can say that China, Japan and other countries are financing the American deficit. Some say that the 
USA consumes Chinese products with money from the Chinese, and the Chinese are maintaining their 
growth based on the request of Uncle Sam (Yves Thréard, Le Figaro, le 12 avril 2009). 
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9249 
 
The estimate of the total exposure of China’s central bank to dollar denominated assets is about 
70%. This has generated concern among Chinese officials, a desirable situation being a total 
exposure to the dollar of 50% or less of the total reserves. That would provide more safety in the 
case of an excessive decline in the value of the dollar. 
In order to achieve this objective, China would have to converse existing dollar denominated 
assets in value of $450 billion in new assets, and accomplish this without triggering a global 
dollar panic.   
Fang Shangpu, deputy director of SAFE (State Administration of Foreign Exchange), has made a 
declaration (18 February 2009) concerning the amount of US government bonds held by China, 
stating  that  they  included  not  only  the  investments  from  the  reserves,  but  also  from  other 
financial institutions. The main principle in reserves management for China is ensuring safety 
and the value of the reserves. 
Considering the evolution of the „subprime” crisis from the USA into an international financial 
crisis, the Chinese officials declared that changes in the global market have been closely followed 
and measures were taken to evaluate and remove risks. Obviously Chinese officials were aware, 
for several years now, of the increasing risks of too great exposure to the dollar. So it is hard to 
suppose that they failed to formulate strategies designed to limit that exposure to safer levels. 
So the rising question is: which is China’s strategy to decrease exposure of its reserves to the 
dollar? 
According to the researches of de Rachel Ziemba of RGE Monitor, in the first two months of 
2009, China has made deals for buying hard assets worth over $50 billion. 
On 23 February 2009 there was an article in China Daily, which presented that as part of the 
National Energy Administration’s three-year plan for the oil and gas industry, the government is 
considering setting up a fund to support firms in their pursuit of foreign mergers and acquisitions. 
Fang Shangpu, deputy director of SAFE, added that more measures will be introduced to support 
firms seeking to expand overseas. The analyst Han Xiaoping said it is time for China to convert 
some of its capital reserves into resources reserves, considering the fact that global oil prices have 
fallen 70% last year, to about $40 a barrel. 
Jiang Jiemin, the president of PetroChina, said that the low share prices of some global resource 
companies  provide  China  new  opportunities.  Investments  in  hard  assets,  so  called  „wealth 
deposits”, natural resources or shares from exploiting companies (with small prices because of 
the  financial  crises)  seemed  like  a  good  solution  for  using  China’s  financial  resources, 
considering the high risk of financial investments.  
It is interesting to analyze the effect of this converse financial reserve in resources strategy to the 
evolution of the dollar. 
First we have to consider the currencies used for the transactions. If the resources buys are made 
in dollars then the impact on the dollar as main reserve currency might be minimum. If other 
strong currencies are involved in the transactions, then the international role of the dollar could 
be undermined.  
China suggested at the G20 meeting that the SDR should be used as an international exchange 
currency in the place of dollar. The proposition was considered to be unreasonable. It would be 
possible to include the Chinese currency in the SDR basket, considering this country’s share of 
the global economy. 
The details of implementing the strategy of decreasing exposure of China’s reserves to the dollar 
are still unknown; there could be swaps among the various state-controlled entities and private 
Chinese investors or some opaque means. It is obvious that China will continue to buy resources 
as long as their prices stay low, the estimation of transactions is of a total $35 billion/month. 
Anyway  the  financial  economy  of  China  is  closer  to  the  real  one  in  comparison  to  other 
countries. 250 
 
At global level it is time for the adjustment of the financial economy to the real economy. In this 
period there shall be redistribution of wealth and final results of the null sum game. 
The measures implemented at a large scale by the economic powers (G20) and the IMF is leading 
to the end of the crises. 
 
Bibliography: 
1.  Tobias  Bayer  ,  China  kauft  Gold  gegen  Dollar-Verfall,  Financial  Times  Deutschland, 
24.04.2009 
2.  David  Milleker  ,    Abschied  von  der  Dollar-Vormacht,  Financial  Times  Deutschland, 
11.04.2009 
3. Premier 'worried' about safety of China's assets in US, China Securities Journal, 2009-03-16 
4. Ambrose Evans-Pritchard , the G20 Moves the World a Step Closer to a Global Currency, the 
London Telegraph, April 18, 2009 
5.  Brad  Setser,  "China's  Record  Demand  for  Treasuries  in  2008",  the  Council  on  Foreign 
Relations, March 2009 
6. Ilie Serbanescu - Poate fi „disciplinat“ capitalismul? - Revista 22 , 24 martie 2009 
7. The Treasury Department, U.S. International Reserve Position, 2009-4-21-15-30-25-21443 
8. Rachel Ziemba, "China's Resource Buys", RGE Monitor, February 2009 
   

China's Record Demand for Treasuries in 2008&quot;, the Council on Foreign Relations,

China's Resource Buys&quot;,

Ilie Serbanescu - Poate fi „disciplinat“ capitalismul? -

kauft Gold gegen Dollar-Verfall, Financial Times Deutschland,

Premier 'worried' about safety of China's assets in US,

the G20 Moves the World a Step Closer to a Global Currency, the London Telegraph,

ABOUT THE ECONOMIC CRISIS

http://steconomice.uoradea.ro/anale/volume/2009/v1-international-relations-and-european-integration/38.pdf

ABOUT THE ECONOMIC CRISIS

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