Sunday, February 15, 2009
Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.The reason for this is clear. Luo is correct that the dollar will depreciate as new debt hits the market. The decline in the dollar will jack up interest rates. China, of course, currently holds $682 billion in U.S. Treasuries, and if the interest rate rises the country will take a bath on those investments. As the old saw goes, when you borrow $30,000 from the bank the bank owns you, but when you owe the bank $30 million, you own the bank. �So other China observers are thinking the country needs to get guarantees on U.S. fiscal policy, but Luo lets us know the game is up. The 10-year bond has amazingly maintained value through the week, adding 16 basis points on Friday but down over the week.
Mr Luo, speaking at the Global Association of Risk Management�s 10th Annual Risk Management Convention, said: �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.�
Mr Luo, whose English tends toward the colloquial, added: �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.�
However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: �There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.�
China may voice its concerns over U.S. government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on Feb. 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation�s third-largest lender by assets. ...Treasury Secretary Tim Geithner said so on television last Tuesday:
�In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar�s exchange rate and make sure China�s dollar-denominated assets are safe,� said He in Beijing. �That would be one of the prerequisites for more purchases [of T-notes].�
A strong dollar is in the interest of the United States. Our obligation is to try and make sure we are pursuing policies that are going to improve confidence in Americans and around the world that we're doing things that are going to help this country ... grow more rapidly.
What we're hearing between China and the US is a quid pro quo: Treasury will accept weaker export growth in return for getting the Chinese to help finance the Obama deficit. The reasons are manifold, but among them are the high rate of savings in China and its need to keep an export market in order to employ workers flocking to the urban areas from its vast countryside. �Maintaining export markets in China means resisting the demands made during the Bush years that China stop managing its exchange rate, which it now will enlist the U.S. to help. �A high savings rate is destroyed if the renmimbi-denominated return on U.S. Treasuries is negative. �(For more, listen to this excellent interview of Vincent Reinhart on the Dennis Prager Show last week.) �
The Obama administration might try to talk a good game on China's exchange rate policies, but Luo's statement is a clear signal that it will have to soften in order to maintain the flow of loanable funds from Asia. �If you're an exporter or someone who faces competition from importers, you can add that to the many other reasons to not like the start of the Age of Socialism.