[Mozkowitz]

http://www.ft.com/cms/s/0/ba857be6-f...077b07658.html

China to stick with US bonds

By Henny Sender in New York
Published: February 11 2009 23:33 | Last updated: February 11 2009 23:33

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.

However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

Luo Ping, a director-general at the China corporate Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

“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 savings 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.”

Mr Luo said China intends to maintain its separation of investment and business banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.

“To some extent, Glass-Steagall has fuelled the crisis,” Mr Luo said. “The separation of commercial and investment banking is likely to stay longer [in China] than before.” Like senior financial officials in other developing nations – such as Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency – Mr Luo also spoke out against what he called America’s laissez-faire capitalism.

“Government ownership was viewed as something negative but the pendulum is swinging the other way. Perhaps banking is [no different from] public utilities where government participation is necessary,” he said.

“Deregulation in the US has gone a little bit too far. The market can’t be omnipotent.”

[muzioler5]

While I certainly disagree with his assessment of laissez faire capitalism, he does have a good point about how China must stick with US bonds. If they don't, then China's exports will fall even further given the decreased value of the US dollar. Of course, if China floated its own currency then perhaps it'd adjust naturally... but that would be too fair.

[unbalanced zealot]

“Except for US Treasuries, what can you hold?”

Chinese domestic infrastructure development.

Multi-billion-dollar equity stakes in companies such as mining giant BHP Billiton.

etc.

US Treasuries essentially are a holding not an endgame. Both China and the US are in a chess game on this ATM.
I'm sure in the short term China will stick with the scenario at hand, but over the longer term ...

[Locke13]

I was always for China working towards minimizing their trade with the US.

Us is is essentially a bankrupt country. Its debt is greater than its total GDP. Even when China let their yuan appreciate the debt didn't get much smaller cause its the staggering amount they trade that makes all the profit, not the added-value of the goods. If china keeps allowing US to buy their goods with debt their never gonna be able to pay, its going to get them nowhere. Mean while they have a billion strong population saving like its the end of the world. I know resorting to protectionism is going to finish everyone off but China can start working towards some sort of system and gradually decrease its reliance abroad (or at least from the us) and increase internal consumption. The whole US economy is living on debt and is going to continue doing so for a long time. No one wants to be tied to a sinking body.

So yeah, we hate you guys. Haha, great quote

[muzioler5]

I was always for China working towards minimizing their trade with the US.

Us is is essentially a bankrupt country. Its debt is greater than its total GDP. Even when China let their yuan appreciate the debt didn't get much smaller cause its the staggering amount they trade that makes all the profit, not the added-value of the goods. If china keeps allowing US to buy their goods with debt their never gonna be able to pay, its going to get them nowhere. Mean while they have a billion strong population saving like its the end of the world. I know resorting to protectionism is going to finish everyone off but China can start working towards some sort of system and gradually decrease its reliance abroad (or at least from the us) and increase internal consumption. The whole US economy is living on debt and is going to continue doing so for a long time. No one wants to be tied to a sinking body.

So yeah, we hate you guys. Haha, great quote

China letting their Yuan appreciate was more of a superficial gesture than anything else. If they float their currency, the trade gap will even out. As for the US being a bankrupt country, that is far from true. Other nations, such as Japan and many EU powerhouses, have deficits bigger than America's deficit.

As for weening themselves off American goods or foreign reliance, we've seen how that has impacted other countries around the world. In this day and age, you can not isolate yourself and expect that your economy will magically grow. While China is excellent at mass producing goods, it lacks in areas that other nations excel at. For example, China's technology sector is growing but it certainly isn't at the level of Japan or America. Also, China's energy needs will not be met through domestic supply. Last, China's education system falls far short of other nations. One of the many reason's why China is in the situation it is currently is because of students who were educated in America and brought back that knowledge. Even if China only partially engages in protectionism it'll drastically effect their 8% growth mandate from heaven.

And regarding the US, I believe they are doing fine in regards to current accounts. Its huge, theres no doubt; however the American people reap what they sow. Eventually the world will get tired of holding onto debt and they'll either sell it (decreasing the value of currency, causing a loss in value for their investment) or they'll buy American assets (which tend not to perform too well as the Japanese have found out). Worst case scenario, Americans are forced to buy American for a while and American goods are swallowed up by China, Germany, Japan, and whoever else holds American currency