The nytimes is reporting that despite China’s $ 1.8 trillion dollars worth of foreign exchange reserves, China’s central bank is in serious need of a cash infusion. This is a result of major losses from a trillion dollars worth of bad investments into US Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac. Even more interesting though are the possible ramifications of the central bank's need for a cash infusion from the Ministry of Finance.

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

If the Ministry of Finance were able to exert enough pressure to slow or halt the rise of the RMB, this would be welcome news for much of the manufacturing sector and would also be good news for many western firms doing business in China.  A pause in RMB reevaluation wouldn’t solve all of the manufacturing sector's problems but it would at least remove some of the pressure.  It would also be one of the more interesting consequences of the meltdown in mortgage-backed securities.