I think so.  CNBC’s Erin Burnett is currently doing a piece in Hong Kong about the relationship between China and US, with exporting goods and buying the Treasury’s debt.  Interestingly nice follow to my previous post…

One of the reasons Secretary of State Hillary Clinton is visiting China is to persuade leaders that US debt is still good.  *chuckle*  Sorry, I couldn’t hold that one back.  Here’s a good overview article in the WSJ.

An article of inspiration came across my way, Why China Needs US Debt, thanks to curious friends.  Yet I’m not sure if this article does a good job of tying together its own answer to the title question.  Why does China need US debt?

Let’s break it down to the simple GDP equation found in any econ 101 text: GDP = Consumption + Investment + Government Spending + Net Exports.  We also must think in the context of Chinese habits and culture.  Generally, it’s understood that the US depends on the majority of its imports from China, and China depends on us for the majority of their exports.  Of course the question rises of how much each country is exposed to another, but that’s a different discussion.

China is an overall net exporter, where the country exports more than it imports (US – vise versa).  Most countries are typically one way or the other, few are equally balanced.  Investment and consumption is not exactly the focus here, where those variables focus on the aggregate of the individuals.  Government spending more so – on top of reinvestment into a country’s infrastructure, welfare programs etc, a government typically invests in other governments with its excess money (in China’s case – excess from exporting).

A question came to me – why doesn’t China reinvest in itself (rather than investing in US and elsewhere)?  With the fact that the country’s GDP is disproportionate to it’s population when comparing to other country, my answer is this:  China has had outrageous growth rates, in the double digits.  That’s why it’s considered alarming that its current growth rate is 6.8% q/q.  But one can not think of GDPs growth rate as a ‘return on investment’ kind of deal.  6.8% just means that from the last quarter, China grew its consumption, investment, gov’t spending and exports.  Unless you were able to make an index betting on the GDP of China, you can’t theoretically invest in it’s GDP, take the proceeds and reinvest.  

China’s government is reinvesting in itself, a lot.  The reason why it’s behind other countries is that the government is playing catch up since the mid-1900s after realizing protectionism is not the way to go.  Also, the country is still very agrarian – not comparable to that of Western Europe, US, etc.  

US lops up all of China’s exports, and as more of a convenience, China lops up all the US debt.  Investing in US treasuries, at least in the past, has proven to be very liquid.  And with China already earning US dollars with its massive exports, it does not have to exchange its currency to buy debt from the US (avoiding huge exchange risk).  While it may not yield the greatest rate, governments investing in US treasuries are looking for safety, security, and liquidity.  The reason why one invests is they do not need the money now but they want a return on their money.  Governments often have future obligations, like social security payments.  The government will put the tax money away, and being prudent, will look for security rather than return.  As I said, liquidity is another requirement – as the government may need to liquidate for immediate needs (*cough cough* leading to another topic of US’s lack of social security).

Of course now, you can see why Clinton must convince China to stick around…The US needs money, it needs someone to buy the debt.  That alone gives it the air of illiquidity.  And if anyone has even looked at the yields, they are pitiful.  Mind you, our image of security is being badly tarnished with what’s happening within our borders.  You can almost picture Uncle Sam holding a gun to China’s head saying “We’re bankrupt – buy our bad debt.”

“You can now buy Citi for less than their ATM fees!” -coworker.

classic.

Alright hopefully most of the members of the ‘B-con book club’ have read through a good potion of the first half of the book. 

I’ll admit it – I’m a slow reader.  So thank god for the day off next Monday.  But I do have some thoughts that I’d like to see float around.

First off – before reading this, I intended on getting around to reading the Wealth of Nations.  Well – thankfully, I don’t have to, nor do I have a desire to.  But chapter 3 has just reiterated him being a grandfather to economics.  Like that cute old man that has stories and stories on end to share.  I wish I could hear him ramble. 

I was surprised to read that a lot of ideas of his were collective efforts from others, not necessarily originally his own.   Did anyone know this?  In the introduction, he lists who he’s going to talk about in the book, e.g. a madman, a skeptic, a tramp.  The philosopher now clearly is Smith, despite him being ‘unoriginal’ in his most popular book.

In the book, Heilbroner raves how Smith put together the idea of selfishness being productive for the nation as a whole, that this concept of greed socialistically benefits personal need.  During Smith’s time, the market did operate in laissez-faire fashion.  But, does it now? 

 Side note - I’m just loving the relationship between Malthus and Ricardo.

 Happy reading

A  man who has looked into an economics textbook and concluded that economics is boring is like a man who has read a primer on logistics and decided that the study of warfare must be dull.  Heilbroner – The Worldly Philosophers.

awesomeness.