Sunday, February 15, 2009

China Stuck with US Bonds

From the lips of Luo Ping, director-general at the China Banking Regulatory Commission comes some rare honesty, mixed, unsurprisingly, with a healthy dose of statist paternalistic garbage. Quote: "We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do... Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Yes, he gets it. China has become a de facto shareholder in the US dollar through its gargantuan holdings of US Treasuries, and is about to get severely diluted. It must suck really bad to hitch a ride on the US economy, and watch it derail. You (China) are left holding boatloads of bonds you cannot sell to anyone, and will have the pleasure of watching them melt away slowly... or not so slowly. You have tens of thousands of factories that cannot survive the plunge in exports, and will in addition get hit by a weaker dollar, if you let the yuan keep appreciating. If you devalue the yuan, you are only adding to the your US bond pile, with very little effect. Meanwhile, the laid-off factory workers are not happy campers, and are not exactly the domestic consumption you badly need. And since the Party is never wrong, you can only blame it to deregulation in the US. You did not bet the house, and keep reinvesting any gains and virtually all your income, on the wrong horse - the jockey did not whip the horse hard enough. There, you got an oh-so-not-free lesson in capitalism, Comrade Luo - you could have learned from Japan's experience trying to take over the US economically, but you were too smart... and we love the deflation you were exporting for us.

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