11 June 2010

Chinese / US debt?

Dear TCG

How does China buy our debt if they are one of the poorest countries on earth?

China is supposedly buying more than 1 trillion of our current debt. I am aware that we have a trade deficit but it is no where near that amount. So how are they buying our debt? Or are they?

[Insert funny name here]

Dear Insert funny name here

Erm China isn't one of the poorest places on earth its not been for a while it is ranked as #3 since 2008 collectively some of the people are piss poor though, but not everybody. Though a lot of the wealth in China is paper wealth. TCG met this cunt in Beijing who kept on buying up houses the government built as social housing he did this along with his friends and kept them empty so he could charge hugely inflated rents. He was leveraged to the moon and then some.

However there are 2 issues at work here individual wealth and collective savings behaviours, people in Korea, China, Japan, Taiwan etc all tend to save swathes of their money, this attitude even occurs down to 2nd and 3rd generation children born to Chinese overseas. I've seen some ridiculous things occur in Chinese society where people bought expensive things using thick thick bricks of notes. Way back I remember my aunt going to a Volvo dealership and rather than signing a credit agreement she put down all of it in cash. Even poorly paid people can reign in their savings.

Even though they have had high economic growth for a very long time and the income per person is not great there are lots of them and they collectively save their money. They restrain their purchasing for a rainy day.

I think this is a culural thing as China and the whole region has had famines for the past 2000 years and recent events such as the the trauma of civil wars in the 1920's, the Japanese invasion in the 1930's, the communist revolution the 1940's, the "great leap forward" that led to mass starvation in the 1950's, and the Cultural Revolution and the witch hunts meant people tend to save for a rainy day.

Also the fact there is no socialised medicine and highly restricted welfare system (you need to return to your home village to be eligible for it and it's not much)

But as a result, China exports much more than it imports. That is especially true of manufactured goods.

China imports raw materials and has been quietly buying up South America/ Africa and central Asia to do this and uses those to make consumer goods or parts for machinery like phones cars and other tat.

Most international trade is earmarked in dollars. Even of you export the shirts to England you'd prefer to be paid in US dollars. So, they must do something with that excess cash.

Fortunately, their friend / Sucker across the expanse of the Pacific ocean, the USA, is filled with consumers who shop till they drop even when their wallets are empty they keep shopping with money they borrow.

The US has a government that had a surplus in the 1990's but went way into debt to pay for Iraq even as it was cutting taxes. So, America must borrow (read print money) China will lend by buying US debt.

While Chinese leaders speak of dumping dollars for another currency, there is little prospect of that.

So the Chinese people work they save money, which the central China government bank uses collectively to buy US$ bonds. These bonds are used to buy goods from Chinese factories, which the workers save which the central China government bank uses collectively to buy US$ bonds etc etc.

The problem is China isn't happy with the way Obama keeps printing out money and devaluing the $$$ they are holding so China is actually starting to spend the money. In central Asia in 2009 I kept meeting Chinese work gangs everywhere, huge infrastructure projects like the north south water system are being rushed. The Macau Hong Kong bridge is to be started in 2011 originally planned for 2015.

The Chinese are very unhappy about this as there was an article in China about how Hu Jintao gifted the USA with 15 USS Nimitz class carriers due to the devaluation of the currency.

Thus the CCP are attempting to spend them fast as possible updating their weapons systems sealing their roads up and building more infrastructure such as the harmony high speed railway.

1 comment:

  1. Except that China is printing money at an even greater rate than the US. That's why they are able to print more bonds than logic would suggest.