4/14/2009

China isn't stupid

Last time we were in class we discussed the problem of a lot of foreign ownership of U.S. treasury bonds and the risks that we are facing by deflating the value of the dollar on purpose. China currently owns 70% of the $2 trillion of foreign held reserves. China recently asked for a guarantee of safety of their assets, due to rising concerns of U.S. spending. Dallas Federal Reserve President Richard Fisher recently pointed out that China wouldn’t dare do anything to harm U.S. interests, like dumping the treasuries they own, because U.S. and Chinese interests are directly connected. We rely on Chinese investment in our treasuries for revenue, and China’s economy relies on U.S. consumer spending. And despite the continuing economic turmoil, the U.S. dollar is still the preferred currency of the business world. China would be giving itself a huge kick to the crotch if it tried to get rid of the treasuries it’s currently holding. Whether they wish they had bought them or not, they’re stuck with them for the foreseeable future. You can read more about what Mr. Fisher said about the situation here:http://news.yahoo.com/s/nm/20090414/bs_nm/us_fed_fisher;_ylt=AqlZtLX_x97QmqMFhr.BFXXv5rEF

6 comments:

anthony said...
This comment has been removed by the author.
anthony said...

It's amazing to me how countries can make the mistake of not diversifying. You would think they would have seen this coming, especially seeing how Japan made the same mistake in the 80's.

Calvin said...

I'm not so sure that China would be the country hurting most if it cut off trade with the United States. How can a country who holds a sixth of the world's population depend so much on a country so much smaller. Consumption in the US of Chinese goods is probably not a massive part of China's GDP. Their technology is to where they sell their stuff to everyone in the world by now. I think that everyone outside of the United States is just so focused on what goes on within the United States, that they forget about their own problems and culture. Almost every nation, especially Europian, have practically Americanized it seems. They listen to our music, watch our movies, read our news. I think they could do well even without us.

Luke said...

China may not be stupid, but they weren’t being too smart when they decided to put all their eggs in one basket. Any good investor or student has been taught to diversify their interests so that if one just so happens to take a nose dive they wouldn’t lose everything and it seems that China has done just that. The United States is a good investment, but is it good enough to put approximately 1.7 trillion dollars into? China wouldn’t lose everything if they were to sell their investment but it definitely is not in their best interest. China would lose a lot of money.

Dr. Tufte said...

-1 on Caleb and Calvin for spelling errors.

Anthony: this is because these countries are not run by people whose job depends on being diversified.

Let me offer an analogy. China chose us, not the other way around. For whatever China's future economic potential, at this juncture, they are the puppy that just followed us home. Yes, they can go anywhere else, and we specifically are not that important to them, except for the fact that they chose us and committed to us. Now they're stuck with us whether we're nice to puppies or not, and there isn't much they can do about it.

Spencer said...

I think that one point that is rarely made is that Chinese purchases of US Treasury bonds has some positive aspects. US Government spending won't decrease if there aren't funds available to lend and at least as far as stimulus spending is concerned it is only effective if it doesn't take away from the supply of money that can be lent domestically. So foreign investment lets the US government inject money into the economy without taking any from consumer spending and domestic investment. While concern about becoming too dependent on China in the long term is rational at the same time it is actually an ideal solution for the short term goal of economic stimulus.