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  • China's Banker Blues

    This Saturday the Washington Post reported:

    Exerting its new influence as the U.S. government’s largest creditor, China yesterday demanded that the Obama administration “guarantee the safety” of its $1 trillion in American bonds as Washington goes further into debt to combat the economic crisis.

    China surpassed Japan last year as the largest foreign holder of Treasury bonds. Any indication that it intends to cease those purchases — or, worse, stage a sell-off — could drive up the cost of borrowing for the U.S. government, as well as send mortgage rates higher for millions of Americans.

    That reality, experts say, has given China more leverage in its dealings with Washington, with some seeing Wen’s comments yesterday as amounting to economic saber-rattling.

    But as Heritage research fellow Derek Scissors shows, China’s creditor status does not make them nearly as powerful as they let on:

    Buying our bonds doesn’t give the P.R.C. that much leverage over us because they lack viable alternatives—largely because so much money is involved.

    Subtracting how much China paid for U.S. goods and services last year from what we paid them leaves the P.R.C. $266 billion ahead. The year before, they racked up $256 billion that way.

    Now for the most important part of the discussion: China can’t spend the money at home. Beijing has set up a system whereby (1) money can’t flow freely in and out, and (2) China’s central bank—the People’s Bank—must buy dollars from whoever wants to sell. … The People’s Bank must, by law, buy all dollars it is offered. So nearly all dollars end up right back where they started. Nobody seems to quite believe this, especially inside China. Poor Yi Gang, People’s Bank deputy governor, has to repeat every month that reserves must “unavoidably” or “inevitably” be invested outside the P.R.C.

    Now, “outside the P.R.C.” still seems to leave Beijing a lot of investment options. Here’s where the sheer amount of dollars comes in: It’s very hard to find places to invest all that money. For example, China already has bought more oil than it can store and there’s not enough gold available on the planet to buy with just a year’s worth of China’s trade surplus.

    The only market open to the P.R.C. and big enough to absorb its dollars is our bond market. That’s why China has at least $1.1 trillion, and maybe as much as $1.7 trillion, already invested in American bonds. That’s why China moved $200 billion into U.S. Treasury bonds last year, even though the interest rate was dropping like a stone. Beijing knows it has no real choice, even if it’s very useful to pretend it is America which has no choice.

    Posted in International [slideshow_deploy]

    4 Responses to China's Banker Blues

    1. Franklin's Lock says:

      Excellent point! It is true that China will want to do anything to maintain the value of these bonds, so trying anything that would affect the value would not benefit them. So, the idea of them selling off to drive the price down or trying to put pressure on the U.S. does not make sense.

      China’s statement might have been just political posturing and pandering to countless interests. What is sad is that they have that power in the first place. However, China could be truly concerned about the long term affects of the debt and spending of the U.S. on the value of these bonds and the U.S. economy. For example, with the U.S. keep flooding the market with cash, the possibility of hyperinflation or deflation exist. Anything like this or any other economic downturns derived from U.S. economic polices could be what China is worried about.

      They could be just as concerned as Conservatives about the decision Obama is making.


    2. Spiritof76, New Hamp says:

      I don't understand why you need to read tea leaves to understand what China is saying. It is simple. I am lending you money without any collateral and you are spending like there is no tomorrow by borrowing more and more. I would be concerned about your ability to pay. Same thing the Chinese are concerned about when they hold $1T of our treasury debt with no collateral and we have no limit to borrowing.

      I would love to see the Chinese start demanding collateral for future buys of our debt. We will have to raise interest rate to attract any new buyer of our debt. We may have to sell the Chinese our oil and gas reserves and exploration rights as collateral. We won't be needing them anyway since we are leap-frogging to the Smart grid with wind farms and solar panels for our energy. We will also have electric cars. How about that?

      As much as it would hurt me, I would rather see a showdown on the debt so that our government's ability to engage in grandiose socialistic adventure will come to a screeching halt.

    3. Barb -mn says:

      Do what you must, China. He doesn't float our boat either. He is the opposite of what America stands for, HE expects to be made exception to! True Americans make exception to NO ABLE BODIED HUMAN BEING.

    4. Boomer55, California says:

      We need to fully analyze the concept of "debtor politics". If U.S. owes China $1.3 Trillion dollars – who is really in the better position? In reality, China possesss nothing more than the possibility that the U.S. may make good on its $1.3 Trillion obligation but the U.S possesses the value of the good, services, and credits that China paid for our debt obigation. Mere promises in exchange for tangible products.

      But, the U.S. possess the option of not paying on it obligations. The so-called "Ace up the sleeve". In view of the current financial situation in the U.S. where the Feds are fervently trying to shore up confidence that it will not default on its international obligations, even if it means that the Feds are paying good , but nonetheless freshly printed T-Bills in exhange of tangible goods. This scenario provides the Chinese a market to dump their cheap consumer goods which is required to keep their factories humming at full capacity and their people employed and otherwise content, lest they remember that they are merely slaves toiling for nothing more than the hope of payment of U.S. debt instruments.

      I submit that it would be much easier for the U.S. to, in the very near future, to declare a national bankrupcy with a resulting stay on collections than it would be for China to respossess all of its consumer goods that have already been shipped over to the U.S. and already injected into the stream of commence.

      I do believe that the Chinese see it coming but that they are powerless to do anything about it since the U.S is such a large consumer base for their products.

      So what would be the ramifications of such a declaration of insolvency. Would China require us to go on a "COD" payment plan where everything is paid in tangible currency instead of balance of trade credits and debits? I think not.

      China can take all of our balance of payment credits and deficients but they cannot be used to nourish their citizenry. What we do have in our favor are these nifty but othewise highly sophisticated apparatus we call "cruise missiles". With enough cruise missles, we can essentially take what we want and need almost at will and on a whim.

      So, would you really prefer to be in China's shoes and be owned $1.3 trillion or in the U.S. shoe's where we purportedly owe China $1.3 trillion? You don not have to study too long to figure this one out..

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