China's central bank strapped, sources say

Sept. 5, 2008 at 4:26 PM
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BEIJING, Sept. 5 (UPI) -- The People's Bank of China is seeking to raise capital to shore up the $3.2 billion it has on hand, sources close to the central bank said.

The bank has the option to print money, a move that would fuel inflation, The New York Times reported Friday. Instead, it has turned to China's Finance Ministry for help in spite of a fierce rivalry between the two groups, the Times reported.

The banks troubles stem from a buying spree that included about $1 trillion in U.S. Treasury bonds and U.S. mortgage-backed debt.

Solutions also have international ramifications. The bank's large bond portfolio leaves it vulnerable to rising U.S. interest rates and a strengthening yuan. Nevertheless, a strong yuan -- advocated by the Bush administration -- finds less support in the Finance Ministry than it does at the bank, the Times reported.

A stronger yuan means Chinese goods are less competitive in the global marketplace. Turning to the Finance Ministry for help is also not the bank's favorite option, "because it puts them more under the thumb of the Finance Ministry," Eswar Prasad, the International Monetary Fund's former division chief for China told the Times.

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