Following the preview post on China’s foreign exchange reserves, here is a comprehensive story on how China’s financial policy will shake the world economy.
From the Wall Street Journal By Andrew Browne
China’s Reserves Near Milestone, Underscoring Its Financial Clout
Sometime in the next few days, China’s holdings of foreign currencies and securities will top $1 trillion — a sum greater than the annual economic output of all but nine countries. The rapid growth in these so-called foreign-exchange reserves has made Beijing a colossus in the financial world, cushioned against shocks at home, but potentially able to trigger them abroad.
How China manages its growing pool of wealth has major repercussions for the global economy. Beijing’s reserves totaled $987.9 billion as of Sept. 30 and are growing by roughly $20 billion a month. That total compares with the about $1.2 trillion in assets under management at U.S. mutual-fund giant Fidelity Investments.
As the pot grows, the secretive and sophisticated portfolio managers at China’s central bank are trying gradually to boost their country’s returns on its foreign-exchange holdings, at least in part by making somewhat riskier but higher-yielding investments. Last spring, an unsuccessful effort to divine their intentions sparked a steep run-up in the price of gold.
For the U.S., how China deploys its reserves is a question of some consequence. Most of China’s currency reserves are invested in U.S.-dollar-denominated debt, such as U.S. Treasurys, which are considered the world’s safest investment. That has kept demand for U.S. Treasury notes high — and interest rates low. A change in that pattern could affect how much Americans pay for mortgage loans and other borrowings. Read the rest of this entry »
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The Chicago Mercantile Exchange and the Chicago Board of Trade is to merge in an $8 billion deal. The merger of the two longtime competitors will create the largest derivative market in the world
The new exchange, to be named CME Group, will have an average daily trading volume of about 9 million contracts, representing $4.2 trillion, much larger than the New York Stock Exchange’s $87.2 billion daily trading value.
The merger signaled the rising position of Chicago as the world finance center. It also marked a milestone on the track of market integration.
From the New York Times:
Two Exchanges in Chicago Will Merge
By Alexei Barrionuevo
The Chicago Mercantile Exchange and the Chicago Board of Trade, longtime fierce competitors, said Tuesday that they would merge in an $8 billion deal creating the largest market for financial derivatives contracts in the world.
The transaction would be the latest in a wave of mergers among the leading financial exchanges, as they transform themselves from member-owned clubs to for-profit companies competing in markets that have become increasingly global and electronic.
The New York Stock Exchange, the Nasdaq Stock Market and smaller exchanges have announced mergers, and the New York exchange’s recent pursuit of Euronext, operator of four European stock markets, is driven in large part by Euronext’s derivatives exchange in London.
A combination of the two Chicago markets, which were founded in the 19th century to trade agricultural futures, would trumpet the spectacular rise of derivatives — financial contracts whose value is tied to or derived from currencies, interest rates, commodities or other things of value.
Derivatives have made risk more manageable for many businesses, including oil companies seeking to insure themselves against storms and banks trying to protect themselves against home mortgage defaults. Yet they have also fueled trading blow-ups, as in the near-collapse in 1998 of the hedge fund Long-Term Capital Management that shook the financial markets. Read the rest of this entry »
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