China, the cash triple trillionaire
economist.comSpain became ridiculously wealthy after its conquest of the Aztecs and Incas at the beginning of the 16th century but by the end of the century it was bankrupt. I am not saying that China would be as foolish as the Spaniards in squandering their wealth but I am saying there is precedence for it and it does seem like retaining wealth is far more difficult then creating it. Japan would be another case in point. It will be very interesting to see what China's strategy is. It does look like they are reaching the end of the road on their current path especially with America's financial markets being what they are.
The chinese have become wealthy because their people are producing more. Their farms produce the same amount of food, while the children are making things in factories. The world, and china, is richer because the chinese people are make more of the things the world needs.
Filling ships full of gold can only make people temporarily rich. Investing in gold is paying someone in south africa to dig rocks out of the ground and melt them down, then paying someone in kentucky to dig a hole and store it. China has contributed much more to the world than 16th century spanish gold thieves.
Holding $3 Trillion in boring American gov securities seems like a safe way to shelter itself from price fluctuations if the FED decides to play with the interest rates.
I can't tell if you are being sarcastic or not, but I'll bite. Price fluctuations are of huge importance to the Chinese. They gave the US lots of labor and their domestic savings in exchange for US treasuries. Now those US pieces of paper buy a lot less of the things chinese people need (oil, food, raw materials, etc.) than when they generated those savings.
China should have never bought as many treasuries as they did. They should have bought harder assets, like oil company equites, timber and farm land, mining equities. When they tried to buy an oil company, congress blocked them. There is still no reason they shouldn't have bought diversified assets.
Providing cheap financing for US government during the 2000's, was neither good for the US, nor for China. The US got an asset bubble exacerbated by the cheap money, and the Chinese now have dollars that buy 1/2 as much as the dollars they used to buy the treasuries.
Ok, so your overall point is that "Chinese now have dollars that buy 1/2 as much as the dollars they used to buy the treasuries". But isn't this due to inflation and the dollar becoming devalued due to sub-prime disaster and overall global loss of faith in the US economy? Having the $3trillion in US gov securities is still good because it still shelters it from price fluctuations. So the cost of things made in China will still be cheap and US/Europe will still import them. If the $3 trill had been invested in harder assets as you suggests, the Chinese would have made a nice profit yes, but it doesnt safe-guard its import/export industry.
China can buy almost anything for a price—but almost nothing for today’s price.
In a way, they have become too big to succeed.
It is good to keep this in mind. China as VC of last resort? They could fund the equivalent of the entire 1995 - 2001 tech bubble.
No - China as VC means that the government takes over your company, and they would own all your IP (ie give your ideas to "natively developed" companies so they can compete against you with your own work). Would you want that to happen?
GP did say "last resort." Sometimes it's more important that a thing exists than whether or not you make a profit off it.
No mention of the way China subsides its own banking system in such a way that $3 Trillion in reserves is somewhat illusionary ..pet project disasters alone are $1 trillion counting the high speed rail disaster..and that is before factoring in the banks that China is holding up to prevent them from closing..
"the way China subsides its own banking system in such a way that $3 Trillion in reserves is somewhat illusionary"
Care to expand on this a little bit? I don't quite understand
I'll make it simple.
Ordinary chinese citizens save $1T in bank deposits.
Bank loans the $1T to mall developers, and high speed railway developers. The developers promise to pay the money back.
They don't pay the money back, because the mall is empty, and no one can afford the high speed trains.
The people worry that the bank can't pay them back, all rush to the bank to get cash.
The Chinese treasury uses $1T in USD reserves to stop the run on the bank.
So, what he is saying, is that the Chinese central bank is already on the hook for about $1 trillion in bad bank loans.
"Ordinary chinese citizens save $1T in bank deposits."
Wrong. Chinese save in Renminbi. Mall developers pay builders in Renminbi. Banks potentially default on borrowers in Renminbi. Dollars are only for buying commodities, and external trade. There's 1/5 of the world's population in China who trade and do work for each other and they don't pay each other with dollars.
"The Chinese treasury uses $1T in USD reserves to stop the run on the bank."
How does it do that? Do you mean the whole money is an illusion thing? And people only work when they have trust in the government backed bills? Cos this argument can work for any country too really..
A fine summary except...
.. what does a rice farmer in Northern China do when the government gives him 1000 crisp dollar bills ("or their electronic equivalent")?
He should go back to farming. He now knows he can spend the 1000 bills, or gold coin, or whatever at a later date when he so chooses. When the time is right, the $1000 dollars can be used to pay his daughters college tuition, or buy a tractor. It doesn't matter, the only important thing is "when the time is right." It is an economic mess when ordinary people can't time shift their spending. This is why good governments guarantee deposits, and keep inflation low.
Yeah, I don't understand your comment, either.
The $3-trillion is foreign exchange reserves China has accumulated from running massive trade surpluses with various countries.
They may blow some of those reserves on failing pet projects, but that just bolsters the point of the article: that it's nearly impossible to spend this money, let alone intelligently.
It appears you've confused China with a dollarized economy, like Panama or Ecuador. China bails out its banks with Reminbi, which the people's bank of China prints electronically -- not with dollars.
There is still some sort of Ricardian equivalence that will play out through inflation and exchange rates and employment. Being able to print money, doesn't stop major problems when bad loans are made. Bad housing loans were made in the US, and it ended up increasing the US debt significantly, even though the US governement can print money. China faces the same issue, and it will reduce the reserves significantly.
China's national debt is 4% of GDP and they have balanced trade. They don't need to borrow when they have 3 trillion in reserves. Totally different animal we're talking about here.
It is indeed worth considering that China's semi-insolvent banking system might involve a larger cost than China's foreign reserves. But the question is whether the two are comparable.
It's not like China could go to the US and demand we ship banking system or our excess housing stock to them.
Also, it may be a significant to note that increased its foreign while it fell into trade deficit. If that keeps up, the nation will essentially spending money to stay cheap while it spends other money on the many dubious projects from high-speed rail to excess office buildings.
Foreign currency surpluses are different state debt. Japan has the world's second large dollar reserve - and the world's largest state deficit as a ratio of GDP.
http://www.nytimes.com/1997/03/01/world/japan-s-road-to-deep...
China's public private fusion system is a bit different from Japan of course. But claims for the strength of China are monumentally overstated as far as I can tell.