Stop Being Wrong About China Buying Our Bonds • Hacker News Board

Re: Stop Being Wrong About China Buying Our Bonds

#61

Post by skue » Fri, Oct 18, 2013, 2:53 PM UTC

drcode wrote: post #33

Here's my simplified way of thinking about it: The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism. How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean…

> Plus, poverty stifles political activism.

Do you have evidence to back that up? I can think of a number of examples to the contrary offhand: The French Revolution was preceded by a financial crisis and poverty, as was the rise of the Nazism in Germany. There's Mohamed Bouazizi, the poor and repressed fruit vendor who helped launch the Arab Spring in Tunisia. And even the Occupy and Tea Party movements that have each arisen in response to the economic situation within the US.

Re: Stop Being Wrong About China Buying Our Bonds

#62

Post by efalcao » Fri, Oct 18, 2013, 2:53 PM UTC

westicle wrote: post #2

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor. I…

I think the author is making the point that the simple act of buying the bonds is accomplishing their goal.

They don't care what the return is, they just want to offload dollars. If you don't care about the return, then something is not an investment - the quality of the borrower (based on their ability/history of repayment) is moot.

Re: Stop Being Wrong About China Buying Our Bonds

#63

Post by efalcao » Fri, Oct 18, 2013, 2:54 PM UTC

skue wrote: post #61

drcode wrote: post #33

Here's my simplified way of thinking about it: The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism. How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean…

> Plus, poverty stifles political activism. Do you have evidence to back that up? I can think of a number of examples to the contrary offhand: The French Revolution was preceded by a financial crisis and poverty, as was the rise of the Nazism in Germany. There's Mohamed Bouazizi, the poor and repressed fruit vendor who helped launch the Arab Spring in Tunisia. And even the Occupy and Tea Party movements that have eac…

No Godwin

Re: Stop Being Wrong About China Buying Our Bonds

#64

Post by jfb » Fri, Oct 18, 2013, 2:55 PM UTC

dllthomas wrote: post #27

jfb wrote: post #12

Earlier quoted context omitted.

Two problems with this: the first Yglesias covers in the OP; the second, that China could nuke us, even if they wanted to.

What would stop China from nuking us if they wanted to?

They lack the delivery capability. They might have ~20? ICBMs and no SSBMs. They are very clearly determined to become a regional power rather than an intercontinental one.

Re: Stop Being Wrong About China Buying Our Bonds

#65

Post by CrunchyJams » Fri, Oct 18, 2013, 2:55 PM UTC

Wow, where to begin...

1). Interest and principle on USTs are paid in USD, so the notion that the Chinese government simply "wants to send those dollars back to the US" is bunk since they're ultimately getting more back

2). If the Chinese government wanted to directly influence USD value, they could also simply hold onto the USD as currency reserves to take it out of the market / reduce supply

By buying US debt, China is doing the same as the Fed: lowering yields/increasing prices of USTs via increased demand. This allows the government to keep borrowing large amounts, which in theory should offer the cash needed to continue buying Chinese goods.

Moreover, USTs are by far the most liquid high-grade paper available. Pretty much the only possible investment to support volume of the size China needs.

And, while not likely to be used in the near term, this is absolutely an investment in defense. Chinese officials have openly supported the notion that large holdings of Japanese debt could be used as a crippling weapon, why wouldn't that apply to the US?

http://www.telegraph.co.uk/finance/china-business/9551727/Be...

Re: Stop Being Wrong About China Buying Our Bonds

#66

Post by randomafrican » Fri, Oct 18, 2013, 2:59 PM UTC

drcode wrote: post #33

Here's my simplified way of thinking about it: The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism. How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean…

While i agree on the relatively poor part, i'm not so sure about this:

>>Plus, poverty stifles political activism.

It's very likely that the goalfor the Chinese government is to avoid being overthrown by keeping control on how much and how fast the citizen get richer. Keeping them relatively poor guarantees that investments in future growth and future employment keep up rather than turning too soon into a more mature economy that keeps up with domestic demand.

And there's some kind of political argument about equality and history that i would make if only i could manage to sort it out in my head first.

Re: Stop Being Wrong About China Buying Our Bonds

#67

Post by _delirium » Fri, Oct 18, 2013, 3:00 PM UTC

scott_s wrote: post #48

dllthomas wrote: post #26

Earlier quoted context omitted.

I've not been following the connection between currency valuation and threat of default. I'm not sure if it's just my not seeing some connection (certainly possible) or others conflating things that aren't actually connected. Why should I expect less demand for my dollar a week after a US default?

US dollars are the world's currency hub. Let's pretend that there was only one airline hub in the country, and we're going to say that it's Atlanta, because I always seem to use that as my connection. (Atlanta is a hub, but it's not the hub.) Let's also assume that you have to use the hub, no matter where you fly. It's easy to see in this scenario that Atlanta will now enjoy a special status as an airport; everyone h…

Just to add an additional factor, related to stability but not identical: the size and liquidity of the bond market also matters. An advantage to U.S. Treasuries is that the total volume outstanding is extremely large, and they are frequently traded. Therefore even very large trades can be executed quite easily, without completely swamping the market. If you want to buy or sell $50 billion of U.S. Treasuries, that is quite possible.

Other countries that are considered safe government debt for retail investors typically have much smaller and less liquid bond markets, which would make them unsuitable as a place to park China-sized amounts of money. An attempt to buy or sell $50b of Canadian bonds, for example, would involve 10% of the entire outstanding issue (and about 200% of average daily trading volume).

That's one issue with the Euro becoming a reserve currency as well. The total size of the Eurozone is large enough, and the total value of Euro-denominated bonds is large enough, but the bond market is completely fragmented, since a unified Eurobond hasn't emerged. Instead, if you want to park a large amount of money in Eurozone government bonds, you have to trade in all these smaller markets: French bonds, Polish bonds, Finnish bonds, German bonds, Italian bonds, etc., each with a different risk and liquidity profile.

Re: Stop Being Wrong About China Buying Our Bonds

#68

Post by hencq » Fri, Oct 18, 2013, 3:03 PM UTC

drcode wrote: post #33

Here's my simplified way of thinking about it: The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism. How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean…

It is simplified, but it is also wrong. If you're looking for a simplified explanation, the article doesn't do too bad a job. China has lifted over half a billion people out of poverty in the last 30 years. Dismissing that as a side effect of trying to "influence world events" is, frankly, preposterous.

Re: Stop Being Wrong About China Buying Our Bonds

#69

Post by k2enemy » Fri, Oct 18, 2013, 3:04 PM UTC

grimtrigger wrote: post #36

> But that's all it is. It's not an investment. Ridiculous, simply untrue. Currency manipulation explains the conversion from yuan to dollars, but not from dollars to t-bills. Why would China convert dollars to t-bills if they didn't see t-bills as a better investment than dollars?

It is explained in the article.

   But the Chinese government for various reasons
   wants to subsidize Chinese manufacturing. So they 
   want to send those dollars they accumulate back to 
   the United States.

China wants to send the dollars back to the US so that we can repeat the cycle. They could do it by buying US goods or stocks and the author explains why they don't. So the alternative is to buy treasuries.

Re: Stop Being Wrong About China Buying Our Bonds

#70

Post by randomafrican » Fri, Oct 18, 2013, 3:04 PM UTC

mathattack wrote: post #43

drcode wrote: post #33

Here's my simplified way of thinking about it: The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism. How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean…

I don't see it this way. The policy of cheap exports is actually to keep their people employed. Whatever they would be doing if they weren't exporting would keep them poorer than what they're doing today. In addition, the large amount of foreign debt holdings gives them a claim on future output (or land, or other capital) of other countries. That gives the county geopolitical strength.

Poorer and more idle people are also more dangerous.