The People's Bank of China, China's central bank, has begun discussions with the finance ministry on ways to shore up its capital, The New York Times reported, citing three people familiar with the discussions.
The move could make it less likely that China will allow the yuan to continue rising against the dollar and accepting an injection of capital from the finance ministry could also reduce the independence of the central bank, the report said.Halting the appreciation of the yuan could heighten trade tensions with the U.S., which has sought a stronger Chinese currency to reduce the competitiveness of Chinese goods and lower the U.S trade deficit, the report said.The central bank is in need of capital because of its roughly $1 trillion purchase of U.S. Treasury bonds and Fannie Mae- and Freddie Mac-issued mortgage-backed debt.Those dollar-denominated investments have fallen in value against the strengthening yuan, pressuring the Bank of China's $3.2 billion capital base, the report said....MORE
UPDATE: Naked Capitalism has a theory-
...Remember the ploy used by Henry Kissinger in his negotiations with the North Vietnamese? He presented Nixon as crazy, not the paranoiac that he was, but violent, impulsive, prone to extreme reactions if provoked. The notion that Nixon was an utter nut who would do something unthinkable (presumably the unspoken threat was dropping a nuclear bomb) was believed to have served Kissinger well.
Something like that may be at work here. Perhaps a genuine internal power struggle is being played up and positioned to persuade the hot money speculators that the finance ministry may soon have the upper hand, and the finance ministry is crazy enough and determined enough to keep the yuan weak, no matter how dangerous that might be in the long term. That would hopefully convince the hot-money players that their fast-profit revaluation hopes were misguided, and they'd shift their mony back overseas, providing some relief to inflationary pressures....