China is getting a bit twitchy about the US debt

[Banquo's Ghost]

A little while ago, our esteemed KukriKhan raised his serious concern that China might withdraw its investments from the US debt mountain. I rather pooh-poohed his anxiety, arguing that they had a great deal to lose if they did, given the inter-relationship of the two economies.

Time moves on, and as ever, Kukri's wisdom looks like prevailing. Singapore harbour (as many others) is chock full of empty and idle container ships and tankers, marooned by the precipitous decline in world trade. China is indeed getting seriously nervous, and when those fears are enough to speak out loud (which risks spooking the entire global financial system) we might rightly consider Kukri's intial hypothesis.

What is the likelihood then, of US default or Chinese withdrawal? What would be the result? As global trade implodes, are we going to see rampant protectionism? Is anything to be done now that the course of massive stimulus is set - is there time to rein it back in?

If one looks at the graphic below, one may notice that a huge investor in US bonds is Russia. That country is facing its own meltdown - if she defaults, will that kick over the dominoes?

[seireikhaan]

Interesting... Hopefully China sticks it out with US debt, but I can't totally blame them if they didn't.

Also, I wonder how Luxembourg got onto that list.

[Yoyoma1910]

Also, I wonder how Luxembourg got onto that list.

That's who really runs the world.

[rory_20_uk]

Await US quantitative easing - new money to buy old debt. This might either be directly, or if by buying bank debt that can then gear to buy 10 times the value of US bonds.

Little more than a magic trick on a spreadsheet, but it keeps up appearances.

[KukriKhan]

A little while ago, our esteemed KukriKhan raised his serious concern that China might withdraw its investments from the US debt mountain. I rather pooh-poohed his anxiety, arguing that they had a great deal to lose if they did, given the inter-relationship of the two economies.

Bugger me with a fish-fork! And here I'd taken heed of the pooh-poohing, dropped my worry and adopted a more optimistic stance the past 2 months. :)

I wish one of our Chinese-speakers here could give us their translation of Wen Jiabao's remarks (I've read that the tone and pitch used by Chinese official speakers gives indication of the sincerity of their words). Without that I'll have to accept The Guardian's interpretation, and note the context: the end of parliament - and suggest his words were directed more toward the domestic audience, for whom he will soon need to provide a boogeyman (the US) to blame for the millions of former-peasants-turned-factory-workers-turned-unemployed-peasants, who have been and will continue to return to the provinces in droves.

My opinion would change if further worries are expressed.

Await US quantitative easing - new money to buy old debt. This might either be directly, or if by buying bank debt that can then gear to buy 10 times the value of US bonds.

Little more than a magic trick on a spreadsheet, but it keeps up appearances.

Just such a scheme has been discussed within the past 2 weeks ('Teh Fed'; central bank and printing press, buying up Treasury Bonds.

[Louis VI the Fat]

As we've all learned over recent months, the Americans sent the wrong man to the White House. It should've been Kukri. Not only the best solutions, the best foresight as well.

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Luxembourg

Luxembourg is a financial haven. Many of their statistics are therefore off. Foreign clients bank in Luxembourg, Luxembourg buys US bonds with it.

Strangely, the graphic omits the numbers three and four of foreign US bonds holders: at three, Carribean banking centres. (Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, Panama, British Virgin Islands) And at four, Oil exporters. Both account for about $200 billion each.
The UK number also includes the financial havens the Channel Islands and the Isle of Man.

Oh, how I long for the day all these financial rogue states / territories are done away with.

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spooking the entire global financial system

People dealing with the current US administration are...spooked? That's racist!!

Next, you'll be telling us that the Chinese have a slanted view of global economy...

[rory_20_uk]

The rich and powerful need somewhere to hide their money. If not the current ones then expect the UAE / Saudi Arabia / somewhere else to pick up the slack. For countries with little that the world wants and precious little power taking money from the world and getting a cut is very tempting.

[Major Robert Dump]

Well China should know better than to loan money to poor people and it could be argued that they were exploiting the USA. And USA should not take loans they cannot pay back, and expect the government to bail them out with my tax money, because I don't want to pay off some losers mortgage. I'm saving my money in case USA gets foreclosed maybe I can buy it for cheap.

[Furunculus]

kind of reminds me of the EU's enthusiasm for global financial regulation, so we all pay the same taxes and use the same regulation thus preventing enterprising nations from having any advantage over the moribund banking sectors or the continent.

[Alexander the Pretty Good]

Indeed, we must make sure to hold down all to the lowest standard.

[Aemilius Paulus]

I'm saving my money in case USA gets foreclosed maybe I can buy it for cheap.

Of course, you were not serious, but if US goes down, all the other currencies will too, to a large degree. even the Euro and the Yen. The stock market will crash as well, to a much lager scale. So what are you saving your money in? It will be worthless. Unless it is gold, which is always the strongest when paper currencies are the weakest. Even real estate does not guarantee safety recently, as most people recently found out much to their woe (except most notably Japan, whose bubble burst in 1992).

[a completely inoffensive name]

I have to say if you will excuse my language here:

The world economy is really messed up right now.

[Alexander the Pretty Good]

But, but... the President said the fundamentals of our economy are strong! I'm so confused.

[a completely inoffensive name]

But, but... the President said the fundamentals of our economy are strong! I'm so confused.

Wait, I thought that was McCain who kept saying that?

[Alexander the Pretty Good]

If you'll take a look at the catch-all Obama thread, you'll see that the two now agree.

[a completely inoffensive name]

Ah. I can never keep track of what politicians are saying nowadays. Its like their message seems to change constantly.

[HopAlongBunny]

I doubt there is much to fear. China needs the US market to recover-in the short term- to gear up as the dominant world economy for the 21st century.

[HopAlongBunny]

The world is apparently getting twitchy about the U.S. dollar as a reserve currency:

http://www.reuters.com/article/wtMos...52H2CY20090318

If anything comes of these musings America's position becomes increasingly...interesting?

[KukriKhan]

I don't have a huge problem switching to Special Drawing Right, or other mutually-agreed on international currency. As always, the devil is in the details. Most important of which is (to me) who decides the valuation and exchange rates, and how often? Currently it's the IMF Exec Board every 5 years. Every 2 years sounds more responsive to conditions to me. And I'd want a big chair at the Table of Decision.

[Louis VI the Fat]

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Link here