Why China is Holding All That Debt

What does it mean that China are making a lot of noise about the Federal Reserve’s loose monetary policy?

 Via Reuters:

A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.

Asked whether he was worried about the dollar, the chairman of China’s sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: “I am a little bit worried.”

“There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place,” Li said.

At first glance, this seems like pretty absurd stuff. Are we really expected to believe that China didn’t know that the Federal Reserve could just print up a shit-tonne of money for whatever reason it likes? Are we really expected to believe that China didn’t know that given a severe economic recession that Ben Bernanke would throw trillions and trillions of dollars new money at the problem? On the surface, it would seem like the Chinese government has shot itself in the foot by holding trillions and trillions of dollars and debt instruments denominated in a currency that can be easily depreciated. If they wanted hard assets, they should have bought hard assets.

As John Maynard Keynes famously said:

The old saying holds. Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.

But I think Keynes is wrong. I don’t think China’s goal in the international currency game was ever to accumulate a Scrooge McDuck-style hoard of American currency. I think that that was a side-effect of their bigger Mercantilist geopolitical strategy. So China’s big pile of cash is not really the issue.

Scrooge-McDuck

It is often said that China is a currency manipulator. But it is too often assumed that China’s sole goal in its currency operations is to create growth and employment for China’s huge population. There is a greater phenomenon — by becoming the key global manufacturing hub for a huge array of resources, components and finished goods, China has really rendered the rest of the world that dependent on the flow of goods out of China. If for any reason any nation decided to attack China, they would in effect be attacking themselves, as they would be cutting off the free flow of goods and components essential to the function of a modern economy. China as a global trade hub — now producing 20% of global manufacturing output, and having a monopoly in key resources and components — has become, in a way, too big to fail. This means that at least in the near future China has a lot of leverage.

So we must correct Keynes’ statement. Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed; owe him £1 trillion, and become dependent on his manufacturing output, and the position is reversed again.

The currency war, of course, started a long time ago, and the trajectory for the Asian economies and particularly China is now diversifying out of holding predominantly dollar-denominated assets. The BRICs and particularly China have gone to great length to set up the basis of a new reserve currency system.

But getting out of the old reserve currency system and setting up a new one is really a side story to China’s real goal, which appears to have always been that of becoming a global trade hub, and gaining a monopoly on critical resources and components.

Whether China can successfully consolidate its newfound power base, or whether the Chinese system will soon collapse due to overcentralisation and mismanagement remains to be seen.

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53 thoughts on “Why China is Holding All That Debt

  1. Couldn’t agree more. Just don’t ask most economics to think like this – too much like reality for them. I get into an argument every time “China is just making itself poorer by manipulating its currency”. My reply – ” so they should manipulate their currency up (by selling domestic assets to foreigners) and suddenly they will be rich? Why don’t we all do that?”

    • It’s another of those funny neoclassical issues. There are assumptions from the theory of comparative advantage. These assumptions are tested empirically by years and years of data. Some assumptions found to be correct, others are found to be incorrect. Many (or most) neoclassical economists refuse to take note of empirical findings, continue to use models founded in dubious assumptions.

      • China now has a lot of “skin in the game”. If China remained where they were 25-30 years ago, politically and economically, she would be a bigger threat than today, and more unpredictable. We should prefer today’s situation where the “sword” will cut both ways, should either side try to lever their position vis the US debt.

        The weakness we face today is of our own doing, not from trade with China. We have more to fear from encroaching government, financial repression, economic meltdown…think Argentina as a potential model of our future.

        • Agreed. Discussion with Chinese citizens involved in export industries see mutual benefits to the transformation and WTO rules applying to them.

  2. Right.

    When holding someone’s debt you’re holding certain power over that someone and you’re holding some bargain chips. They can use the debt to crush the US economy by dumping it. Cheaper than to do a real war when worse comes to the worst. They can also use those debt to bargain for geopolitical power and territory claim(s). I heard from a Chinese talk show years ago talking about China’s holding the US debt what if US go bankrupt can’t pay back. An expert said: ” Not to worry. They can’t pay but they have assets. So we can have the assets instead.

    • Trade Alaska for the Debt? The Russian Tsar sold Alaska (illegally and immorally I may add) for exactly the same reasons. It will just be an extension of territory, just like Taiwan or Tibet.

      • Trade Alaska for debt?

        The U.S. can do anything it wants. You think the Chinese leadership gives a rat’s ass who gets stuck with the debt in the long run. Their elite have stashed away billions from this debt orgy.

        Nobody cares. That’s the point.

      • China will be happy to cancel all debts if US pro their reunification with Taiwan. China will cancel lots of the debt if US not support Japan in the Island dispute.

        • rc, in an era where you can print your own money, debt is not so important.

          Taiwan will be reabsorbed when it makes sense to do so. And perhaps nothing demonstrates the relative power of the U.S. and China at this point in time, as does this situation.

  3. “Whether China can successfully consolidate its newfound power base, or whether the Chinese system will soon collapse due to overcentralisation and mismanagement remains to be seen.”

    There is the bigger possibility of NO China Collapse the there is one. China is an big state enterprise entity and Singapore is China’s #1 model country.. They are learning and they are not bad students. Their problem is how to balance and divide the cake in a more fair way. They made lots of mistakes but that’s not to say that they are not doing something to make adamants and change as well, although change is very small and slow. Yes it’s one party power government but if they can draw in majority Chinese young people to join the CCP then they are always the majority and will do fine. There’s also a remote possibility the China (PRC People’s Republic of China) and Taiwan (ROC Republic of China) will be the reunification and there will be two party system CCP and Kuomintang (Citizens’ party) take turn to hold the power.

    Never say never.

    • I give the Chinese credit. They set up special trade zones to see how a free capitalist model works, and what problems are faced before unleashing on the rest of the country.

      They are very good students. I give them my respect.

      I am in conversation with a Chinese Agent for a manufacturing company I am considering purchasing direct from (Doing my homework before I visit and finalise deal). Off topic comments about life in China is very positive, and they are keen to visit Australia as tourists. This bodes well for economic fortune AND political freedom.

  4. “So we must correct Keynes’ statement. Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed; owe him £1 trillion, and become dependent on his manufacturing output, and the position is reversed again”

    Failing to mention diminishing returns, no? Chomsky said in that latest interview the principal technical achievement of Chinese commerce so far has been solar panel technology.

    It may be that when oil prices become too expensive a solar solution is discovered, no?

    • Where was the solar-electric basic science/technology originated? Is the Chinese solar panel industry like the early electronic industry — U.S. R&D and Japanese mass production?

    • They have their massive Damn Hydro power, tons of Solar power stored aside, but I fear they’ll never be able to reap the fruit of their harvest… since their air is so polluted the population will die off on a compounded level. That land is already dead, they just don’t know it yet. Just wait for a tsunami to hit the beach where their 4 nuclear plants are. Nothing learned from their Japanese neighbors.

  5. The Chinese buy U.S. debt for two reasons, #1 that’s essentially the agreement they have with Washington/Wall Street, #2 the only market large enough to absorb this amount of dollars is U.S. debt. How else could they possible spend the $’s?

        • Stuff.

          Also, massive under-developed agricultural potential. Also deserts have massive potential solar capacity. Also African population is beginning to develop and become more educated and versatile.

        • The U.S. and China came to an agreement that in order to make a small number of people in both countries filthy rich, the U.S. would scrap the gold standard for international trade balancing [1971] which would allow the off-shoring of U.S and European manufacturing, resulting in the build-up of huge trade imbalances which would then be re-invested in U.S. debt [just as the Japanese had done].

          Nothing happens in this world without people getting paid-off and reciprocation. Now that the crisis has arrived, the elite must become more creative [and they certainly have], while growing larger gonads [and they certainly have].

          It’s all a big con-game, always has been, always will be. It’s what groups do.

      • In addition to Africa, they are also doing the below, though not as much as they want at the present:

        US – grocery shopping(food wine etc import,) Real Estate investing, buying US businesses, Equities the US Stocks market…. That’s why Fed and big corporation are keeping the stock price as high as possible since most buyers (besides the companies buying back their won stocks) are the rich foreigners. Americans moms and pops have not enough money to play on the stock market anymore.

        They also do the same in other countries such in Australia and Canada etc etc….

        • When you have the cash in dollar especially, you basically can buy a lot …. from those who need the money. AT least for the time being

  6. DoubLine’s CEO is probably the best person at Math on Earth speaking English.

    He is a genius, in other words.

    I GUESS they like agriculture.

    I GUESS they’re reading this.

    I GUESS they want to see Australia become Asia’s New Switzerland.

  7. H.S.H. Prince Hans-Adam II: The State in the Third Millennium

    SOME people claim that Liechtenstein – though it only comprises 62 square miles, nestled as it is between Austria & Switzerland with a population of just about 35,000 – has the highest per capita GDP on Earth.

    • You already posted that one in a previous topic. Have you run out of ideas? Word of advise, you need to stay on topic. Your future employer will look at your posts when doing random Google searches. They already do it. As I am self employed, I could not care what a HR Spy thinks of me.

  8. I’m glad you’ve caught most of the way up :)

    But I’m afraid I still cant fully agree.
    The problem is, China still isnt a big manufacturer.

    Its the worlds biggest assembler of manufactured products.
    Its mfg sector is growing by leaps and bounds, but anything remotely high tech, is still designed in the west, manufactured in the islands, and then assembled in China.

    It takes hours to train a Vietnamese worker to assemble ipods from parts manufactured in Japan and Taiwan and Korea.

  9. I think manufacturing of mass products is the problem, and this fuels consumerism. Mass manufacturing is only profitable if the market is highly controlled or cartelized. Otherwise you get over-accumalation, maybe this is why wars are needed to destroy the products of labour without altering the social system. Products with built in obsolescence have to be marketed to create demand. China may well be the factory of the world…but if Kevin Carsons is right and the trend is towards de-centralized, homebrew small scale workshops…then China is screwed.

    Quoting Carsons:
    “One theme is the rise and fall of Sloanist mass-production in light of Mumford’s paleotechnic/neotechnic periodization and his theory of the cultural pseudomorph, and the rise of networked manufacturing as (in the words of Michael Piore and Charles Sabel) the rediscovery after more than a century of how to integrate electrical power into industry.

    Another is the contrast of Sloanism to the leanness, agility and resilience of the alternative economy, with low overhead as the central conceptual principle around which my study of the latter is organized. Large inventories, high capital oulays, and high overhead have the same effect on mass-production industry that shit has on a human body bloated by constipation. The higher the fixed costs required to undertake an activity, the larger the income stream required for a household or firm to service that overhead; the enterprise must either get big or get out, and the household must have multiple sources of full-time wage income to survive. The alternative economy, on the other hand, operates with almost no fixed costs, so that almost all its revenue is free and clear and it can survive prolonged periods of slow business. Because it’s organized stigmergically, with modular open-source designs, innovation costs are spread over the widest possible product ecologies with a minimum of transaction costs. The alternative economy is breeding the rats in the nests of corporate dinosaurs.”
    http://homebrewindustrialrevolution.wordpress.com/

    Orwell on War:
    The war is not meant to be won, it is meant to be continuous. Hierarchical society is only possible on the basis of poverty and ignorance. This new version is the past and no different past can ever have existed. In principle the war effort is always planned to keep society on the brink of starvation. The war is waged by the ruling group against its own subjects and its object is not the victory over either Eurasia or East Asia, but to keep the very structure of society intact.
    George Orwell

    War is a way of shattering to pieces… materials which might otherwise be used to make the masses too comfortable and… too intelligent.
    George Orwell

    The essential act of war is destruction, not necessarily of human lives, but of the products of human labor.
    George Orwell

    War against a foreign country only happens when the moneyed classes think they are going to profit from it.
    George Orwell

    Most people get a fair amount of fun out of their lives, but on balance life is suffering, and only the very young or the very foolish imagine otherwise.
    George Orwell

    • I personally purchase old second hand products that are solidly built, restorable (Parts still available). Real tangible goods that last and cost less than the new rubbish that has built in obsolescence.

    • “Orwell on War:
      The war is not meant to be won, it is meant to be continuous. Hierarchical society is only possible on the basis of poverty and ignorance.”

      I do believe that George got it wrong here. The best way to control people is to give them EXACTLY what they want, that is, satisfy short-term desires [food, alcohol, drugs, sex, electronic stimulation, etc.] in return for giving up long term goals.

      • I agree. Bread and circuses. It works!

        I remember saying no more Christmas presents. We have to tighten our belts. The Government has increased interest rates and we have a house to pay off. That was one big slap in the face for my childhood.

        So I became interested in economics and politics, and now I am a thorn in their side ;)

        Should have sent me an iObamaphone (1980′s equivalent) for Christmas, and Mother could have kept the Christmas lie going.

  10. Pingback: Why China is Holding All That Debt | My Blog

  11. I don’t know how long ago that you came to this realization; nor do I know why you decided to make this point at this time.

    Sir James Goldsmith, back in 1994-1996, used his wealth and prestige to make this point -among others- when he argued against the World Trade Organization and exposed the ill effects it would have on the U.S. and Europe (and also exposed the ugly side of NAFTA for both Americans and Mexicans). But almost all of the “empty suits and dresses” (bought and paid for by Wall Street types) in academia disparaged him.

    The U.S. must walk away from NAFTA and the WTO, plus all other “Free Trade” agreements that it has entered into since then. A pervasive system of high punitive tariffs, coupled to an end to export subsidies, would not be “trade warfare” or “currency warfare”. It would just be a matter of self-defense, which any and evry country should have the right to employ.

    • When the next paradigm evolves, this one will be abandoned.

      Although unbelievably successful for the Elite [debt-money], it was massively unsustainable, and therefore a bit short-sighted, but rest assured, the next foray into the grand adventure of obtaining something for nothing will have sustainability as its main theme.

    • But how would the Global elite shift their capital around to take advantage of the consumer product hungry third world.

      Good for the Third World, but bad for the West. I guess it is war, when you are protecting your future livelihood. But the Politicians don’t listen to their electorate only their backers.

  12. What is the real separation JURISDICTION between the foreign FEDERAL ZONES territories and the Union of the 50 states as a united Republic?
    Is the BUCK ACT valid?
    Is the territory of Columbia a forein territory? Referenced to the “people?

  13. How profitable is the U.S. CORPORATION “war” raids on forein Republics?
    How much US Corp owed to date just to China? = $49 Trillion! How?
    see the Levy placed last year by Ambassador “WU” of China via Supreme Court permit and following World Court Levy issued against US Corp, but excluding specifically all Union states from this debt. See also 2 years ago the 3.9 Trillion in fake Certificates issued by the famous S.E.C. and the following law suit.
    Regarding the CREDITOR status of every private and national citizen of every state of the union, there in no known jurisdiction from the federal zone, unless a “domicile” by IRS has taken place as a kidnapping of your name and by IRS moved into the federal zone; just to list the union citizen in the US CORP record, it did not work. The Supreme Court and also Congress has already set the law to prevent such kidnapping, I.D. theft to event.
    The territory of Columbia is not a state; Purto Rico is not a state, and also any of other instrumentalities of Columbia, are not related, prevented by lack of such jurisdiction.
    So, you the union domiciled natural people, remain the creditor in fact.

    • No institution takes debt that seriously, especially governments. Only individuals think they HAVE TO pay off debt [albeit, many are catching-on]. Institutions just keep rolling it over and over and over and over…

      Debt is a scam on SO MANY different levels.

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