I argued three months ago that China couldn’t possibly dump their treasuries, even as pundits and analysts in the financial channels kept scaring the bejesus out of everyone.

So I was very happy to hear Roger Altman last night say that:

CHARLIE ROSE: Pete Peterson … also talked about the fact that the Chinese hold so much of our debt. Is that going to change, and are they going to change it?

ROGER ALTMAN: A, they’re clearly concerned about it, about the
concentration risk that they have. B, their options for changing it are relatively few, and there’s no scenario in which they can change it quickly. There just isn’t.

CHARLIE ROSE: They’d have to take that money and find another place
to invest it as well, without destroying the American economy.

ROGER ALTMAN: It would be self-defeating to act quickly. Therefore,
any diversification which the Chinese pursue — and they will — will be
slow and gradual. And the risk that so many people talk about, I think
very loosely, you know, the Chinese may, quote, dump the dollar or flee the
dollar. That’s misguided, I think.

CHARLIE ROSE: Because it’s not in their interest.

ROGER ALTMAN: It’s not in their interest and it’s not possible to do
it. So, it’s not a good thing for over the long term, as President Obama
himself said, for China to be — for us to be the consumer and China to be
the lender and have it exponentially grow as it’s been. We have to stop
that. But China’s not going to make — take self-destructive action, and
dumping the dollar or quickly trying to exit the dollar would be very self-
destructive, and they’re way too smart for that.

I wandered 2 weeks ago just how long China could continue buying commodities instead of U.S. treasuries.  Seems like the answer was, 2 weeks!

A big reason why the $20 billion Chinalco purchase into Rio Tinto fell through was that commodities have been on a tear (itself due, in large part, to Chinese demand as an alternative to treasuries).

Time says:

The deal’s outcome also leaves another basic question unanswered: What is China going to do with all of it’s money, if the developed world sends signals that it doesn’t really want it — at least in forms other than investments in US Treasury debt? One of the things a country with more cash than it can possibly invest at home — a description which China fits in spades — does is recycle its surpluses is through foreign direct investment. And China, in fact, has done scores of resource deals in the developing world — of late with Russia, Kazakhstan and Brazil in the old and gas sector, for example. But twice now in the developed world, big Chinese investments have been spurned. First CNOOC, now Chinalco.

I know the answer: Treasuries!

I recently argued that the Chinese have no choice but to keep buying our treasuries.  My friend Aakarsh pointed out they could buy raw materials.  I agreed, but wondered just how much of their 1T in dollar reserves they could possibly convert into ore, beans and oil.

Well it’s happening.  And here’s a rough indication of their pace:

Without this stockpiling of strategic commodities, China’s trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion, he said.

That means about $60 billion per quarter, $240 billion yearly, of which some part is NOT in dollars.  So at this clip, they appear to be using $150 to $200 billion a year of their dollar reserves for materials instead of treasuries.

The question is, how long can they maintain this clip?  It’s not just a question of how much of it they can actually use, but also a matter of how quickly commodity prices bounce back to a point where this strategy is not nearly as attractive.

h/t TBP

Healthcare in China

May 17, 2009

David Leonhardt has a great piece about China in the NYT Mag.  The highlight for me:

And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits, known as the “iron rice bowl,” they once provided to their workers. When a Chinese citizen is rushed to the hospital after a car accident today, the first stop for the victim’s family is often the cashier’s window. Many hospitals won’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving.


There have recently been some signs that China has become more serious about dealing with its imbalances.


And China has announced a plan to provide health insurance to hundreds of millions more people over the next three years. Jim O’Neill, the chief economist of Goldman Sachs, recently wrote that the health care expansion could prove to be “the most important development in the world economy.”

I would completely agree with Mr. O’Neill.  More consumption from China’s own population is the only solution to our trade imbalance, a depressed Renminbi, and I would even argue the stagnating wages in the U.S.

Providing a health safety net will allow Chinese to spend more of their earnings which (exactly opposite the U.S.) is exactly what we need.

How ironic that an old power and the new kid on the block will be tackling this problem side-by-side.  Of course they have the ‘advantage’ of centralized control while we are hampered by politicians who work exclusively for big business, and a media that muddles issues and misinforms, all in the name of quarterly profits.

So, will we rise to the occasion, or will China beat us to it?  What would that say about our long term competitiveness?

Seems like a day doesn’t go by without a reporter asking someone whether they think there is any danger of the Chinese not buying our debt any more.  This week their Premier actually voiced ‘concerns’ and everyone took notice.

But can they?  I don’t see how.  Am I missing something here?

The way I see it, they have to for as long as we continue to have a large trade deficit.  In 2008 we exported 71 billion worth of goods and services to China, and imported 338 billion.  That means they ended up with 266 billion dollars (all the money we gave them in exchange for TVs and other trinkets, minus the money they gave back to us to buy turbines and heavy machinery).  Part of that money goes to buying raw materials, but most of it they keep.

What they do with these dollars is put them into some sort of  interest-bearing but very safe vehicle, mostly Treasuries and Fannie/Freddie bonds.  Recently they had even started experimenting with riskier things, famously investing 3 billion on Blackstone in May ’07.

So what could China do with the dollars it has and continues to accumulate?

  1. Sell them and keep cash instead:  This would remove whatever risk of default, at the cost of producing a negative return (after inflation).  And there would still be the much larger risk of a dramatic fall in the price of the dollar.
  2. Exchange them for local currency: Selling dollars is not what they do.  In fact they’ve been buying 50 billion per month to keep the dollar high and the yuan low.  If they stop doing this the yuan will appreciate, which will make their products more expensive to us and lower demand for them.  Never mind that Washington has been trying to get them to do this for 5 years, it would slow down their growth.
  3. Invest in other countries’ debt: The U.S. is still the safest place to park your money, with its comparatively good governance, powerful army and dollar as trading currency for oil and raw materials worldwide.  Additionally, exchanging their dollars into Euros, Rubles and Riyals will depress the dollar, lowering the value of their remaining assets and boosting American exports while slowing their own.
  4. Diversify: China already has a considerable real estate investment in the U.S. via their GSE holdings.  Hedge funds and private equity is probably too risky and opaque.  And how many large American corporations can they find to sink hundreds of billions of dollars into without running into regulation snafus like the failed Unocal purchase.

Instead my fear is long-term: When China decides it has developed enough technologically and has brought enough of its population into productivity, they can decide overnight to drastically raise standards of living (lowering taxes on middle class, making credit available, subsidizing cars and housing, etc.) and turn their workforce into consumers.  The moment they do this they won’t need us anymore, and they will be free to dump their dollar-denominated assets, striking a deadly blow to the dollar and acquiring incredible ownership and control beyond their shores.

This is not possible now, but it could be in a decade or two.

Useless fingerpointing

February 3, 2009

Unrest is kicking in already, and it’s going to get much worse.

Thing is, it’s easy to blame the Masters of the Universe.  It’s easy for Chinese, Russian and French crowds to blame America.

But let’s not bring that guillotine back just yet.  The quicker we all take responsibility the quicker we’ll get through it.  Let’s keep in mind that …

…we are all guilty:

  • My friend who flipped 3 houses in 4 years, installing tile and wood with her bare hands, literally building her nest-egg.
  • The guy who bought a condo in Las Vegas or Miami instead of playing the stock market (and how is the stock market not speculation also?).
  • My other friend who took out a home equity loan to start a business.
  • All those who used a HELOC for a new car, a Mexico trip, daughter’s wedding and a 50″ LCD TV.
  • The low-income family that used an option-ARM to grab a piece of the American dream.
  • The brokers and agents that made an easy buck.
  • The mortgage bankers who thought they had created legitimate groundbreaking financial innovations.
  • The Wall Street bankers who securitized the loans.
  • The European bankers who couldn’t get enough MBSs and lobbied our government hard so they could get more.
  • The Chinese, Japanese and Russians whose governments invested almost 1 trillion in Freddy and Fannie bonds for a delicious return.

…we all benefited:

  • The consumers worldwide (you and me) who got a better rate on a CD, money market or savings account from a bank that that was buying MBSs.   Ditto for those that got a lower insurance premium, free or lower tuition at a suddenly well-endowed private college, or even a lower interest credit card.
  • The Chinese workers who made the TVs and iPods we bought with our home equity ‘wealth’.
  • The Arab Sheiks, Venezuelans and Russians, when we needed more oil to propel the boom and were willing to pay more for it.

It was all an illusion.

It was fun while it lasted FOR EVERYONE.

Now please let’s not all go pointing fingers at each other.  It helps noone.