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Stop Being Wrong About China Buying Our Bonds

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Re: Stop Being Wrong About China Buying Our Bonds

#2

Post by westicle »

>> 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 also don't see what giving favours has to do with buying and selling bonds.

Re: Stop Being Wrong About China Buying Our Bonds

#3

Post by huply »

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…

Looking at the whole article, the author is making the argument that the Chinese do not "invest" for monetary gain or loss, but rather use the Treasury purchases as a way to decrease their supply of dollars (a strategy necessary to keep their currency devalued, worth less than it would be if it were fairly traded without central bank intervention).

While it certainly is correct that a debtor at risk would have some concern for default, the point of the article is that (the author asserts) China doesn't particularly care for the stream of interest payments on it's bonds, or even the principal payment back at maturity, but rather the tool that the "investment vehicle" (Treasury) provides, it is China's most powerful weapon in sustaining its relatively devalued currency.

Re: Stop Being Wrong About China Buying Our Bonds

#5

Post by onebaddude »

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 have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context.

There is constant fear that someday China (and the rest of the world) will simply lose faith in the credit of the US and stop buying bonds. In the same way that you might decide CitiGroup is no longer a good investment, and stop buying (or selling) their bonds.

But in reality, it's not like the Chinese are looking around at all the sovereign debt in the world and deciding where to put their money. They have an excess of dollars from the sale of manufactured goods to go put to use. They could spend those dollars on American made products (and they do, to some degree), but the Chinese economy isn't quite in need of most of what we manufacture yet, and they have a lot of dollars to get rid of. So they buy US bonds. It's a mutually beneficial arrangement.

I'm glad some of this is reaching the mainstream media. I'm no expert myself, but this crisis, and the past few years have revealed that when it comes to the economy, we have a very misinformed, ignorant population.

Re: Stop Being Wrong About China Buying Our Bonds

#6

Post by scott_s »

I think it's strange to talk about this without mentioning the concept of reserve currency: http://en.wikipedia.org/wiki/Reserve_currency

It's not just China that has a lot of investment in US dollars - and no matter what the policy reason is, it is an investment because their wealth is tied up in the status of the US economy.

Now, our reserve currency status is something that China, along with the rest of the world, can lose faith in. And if they lose faith - because of, say, a default - then there's a serious risk that the US is no longer the reserve currency. And if the US is no longer the world's reserve currency, then a lot less other countries will buy US Treasury bonds, and US easy credit and privileged trade status will end.

Planet Money podcast, "Why The World Still Needs Dollars": http://www.npr.org/blogs/money/2011/08/12/139583229/the-frid...

Re: Stop Being Wrong About China Buying Our Bonds

#7

Post by dnm »

> So what they choose to do instead is to purchase lots of US government debt.

Isn't "purchase debt" the same as "give a loan?" Is he saying China is not buying US T-Notes and Bonds? I don't understand how the US Treasury would not be liable for paying back the principal and interest on the bond. And not paying it back is the definition of a default.

Re: Stop Being Wrong About China Buying Our Bonds

#8

Post by rtkwe »

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 don't fully understand the authors reasoning either but one thing that is highly misunderstood about the bonds is that a) they're not callable, meaning that borrowers can't suddenly decide that they want to get their investment back and b) China while the largest foreign national holder of US bonds (iirc) holds >10% of the issued bonds. Almost all bonds are held here in the US in things like mutual funds and by retail investors.
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