Monday, May 25, 2009

China caught up in a Dollar trap

If you want to get a primer from the chinese primer on imbalances read this. If you need some background on imbalances read the dummies entry here.

It describes a dollar trap. Where China is kinda stuck with its savings and it cannot fuck the dollar up or it will fuck up 70% of its own reserves. So they need to support the dollar bubble. They do so by buying US treasuries. This makes the US Treasuries market one of the most liquid on the planet. Which is a good thing, from a peace on earth standpoint, because everyone is sort of in the same boat.

However the Chinese seem to have found a protectionist way to resolve imbalances. By having state owned monopolies spending their dollars to acquire competitors abroad. Unfair competition I say!

From the FT:

Over the long term, Beijing hopes to reduce the size of its enormous reserves and cut exposure to US Treasury bonds by encouraging state-owned enterprises to use foreign exchange to acquire competitors abroad.

Got it? Can they be clearer in their intentions? Economic war has been going on for years it seems. The paper money that was accumulating were claims on produce and capital. When the produce is not enough to settle claims, e.g. when we consume at 103 and produce at 100 over a sustained period of time, then we got to settle with capital and that means selling bits of corporate america. On the cheap.

Keep in mind that america inc produces 14T per year. If that is growth of 3% which means the mass is at 500T. 2T per year for 5 years (end of crisis?) means 10T means 2% of america, max, has changed hands. Over 5 years. So there it is, why do we care?


Andrew Meyer said...

If China has USD, surely they can use them as they see fit. If you're going to be concerned about it, you should be concerned about what foreign enterprises they buy. Are they going to buy MSFT? Not likely. Would they buy GM? That almost seems more likely...or maybe that's wishful thinking on my part.

I don't think the history of nations buying other nations assets is particularly good. As a kid, I remember the fear mongering about Japan Inc. buying America. Didn't they buy Rockefeller Plaza for something like $1.3B and then end up selling it back at about $400M? That and I believe they bought a lot of golf courses. Wonder how those investments are working out?

My point is that China has the right to buy whatever it wants. Though public opposition prevented CNOOC buying an oil refinery a couple years ago, I believe.

I can't be too concerned though, when they shifted out of Treasuries before, they bought Fannie Mae and Freddie Mac - agencies that are famous for their past not their future value.

Predicting future value in your own country is difficult enough, doing it in a foreign country is more than doubly difficult, don't you think?

Marcf said...

Yeah for sure, on both counts. They can do what they want with their USD, which means shifting out of T-bills into markets? or taking US companies private under Chinese state control?

I agree that predicting anything is hard and predicting anything at a nation level by putting FOREX in the picture becomes a black art of random nature.

The main point for me is that the numbers are so small with 2T/yr max on a 500T beast that it doesn't even matter, it's tiny, and the fear-mongering is just that.

ooohwaaaaa the chinese bogeyman is cometh. Fear! Repent! Fear!

Anonymous said...

China may be in a dollar trap but this will not last forever. More information on the long term risk of monetizing the debt can be found on the weekly Mountain Vision e-mail letter, from Zurich, Switzerland. Just e-mail: and request a free annual subscription and provide your name & mailing address to avoid duplications.

There is no better way to keep up with the experienced, Swiss “big picture” worldview on global politics, the financial crisis, free-market economics, investment markets, gold, the dollar, FED policy & other geo-strategic concerns and objectives. Perfect for investors desiring education on the importance of international diversification outside the US dollar in search of secure, legally compliant strategies to protect and grow their wealth.

Jean-Luc Vanhulst said...

Why do you compare to 500T and not 14T or 11T (the current total debt?)

I think they own close to 1T now. Out of the 11T (or 6 depending on the definition) that's lot?

Marcf said...


Ultimately you want to compare the size of the claims on your economy in terms of the size of your economy because we are in a context where GDP alone cannot support payments and we hit capital.

Economic production is at 15T. Economic growth is 3% so the economy is weighing a 15/0.03=$450T. That is how I get to "economic mass".

Then your number of total US govt debt claims of 11 or 6. So to repay these, fully in capital, means 11 of 500. If they redeem everything in capital it would represent 2% of our economy.

It is a price but not a HUGE one.

Why use that number and not a comparison of total debt floating or GDP coverage of debt?
That is kind of the point. When you overrun your GDP, you can't repay your debts out of your cashflow earning but you have to do it with capital. How much capital is there in the USof A? monetary value estimate ? I couldn't get wolfram alpha to spit that out, but it is roughly estimated above and I used the rough number of $500T.

So the chinese are going to overrun on their total debt claims, a fraction of it. So we have a fraction of 2T, let's say 1T. And maybe they are going to run that balance for a few years. Let's say 10. We are looking at a total claim of 10T over 10 years that cannot be satisfied by GDP alone.

So we sell mass, capital, stocks, corporate bonds. If our economic mass is at 500T, 10T is 2%. So we will sell 2% of USof A to get out of this? do it!

Analysis on the numbers you provide that China holds 1/11 or 1/6 of US government debt, means they are a large shareholder between 9% and 16%. Can they move the market for treasuries? I don't think so, but I don't know.

Anonymous said...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...