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China and the Unlimited Shopping Spree

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China's Worldwide Investments (Source: The Heritage Foundation)

China's Worldwide Investments (Source: The Heritage Foundation)

So this is how China plans to release itself from its dollar obligations.

China, for the past decade and more, has gorged itself on US Treasury Securities, investing heavily in the dollar and amassing by now over $2 Trillion in US assets. They represent the single largest holder of US dollars, and they’re not happy about it.

Oh, it was well and good while the US consumer economy boomed (up to 2007), but now that our economy has slowed, our deficit has soared, and our National Debt has loosed from the realm of reality, China is seeking a way out of its US holdings.

Indeed, as early as March 2008 China expressed its “worry” as to the health of their US investments and the ability of the US to pay back its debt. They have since sounded a steady drumbeat in favor of an international currency, or even a basket of currencies. A recent spat over tariffs exacerbated the tension. It should suffice to say that China is deeply unhappy with its investments in the US dollar, and, after seeing Obama’s $9.2 Trillion deficit projections, seriously doubts that the US will be able to pay back its debt.

At the same time, China is trapped. They hold $2 Trillion in securities and cannot get rid of them. As the largest holder of US assets, the rest of the world takes their lead when it comes to US investments. If China were to suddenly sell their US Treasuries, or even hint that they were about to, the rest of the world would likely follow suit, crashing the dollar and rendering China’s investments worthless.

Likewise, the US economy itself would collapse, along with our consumer power, should China decide to dump its US assets. Since China’s economy is “export-oriented” (their prosperity depends on a huge export vs. import ratio), collapsing the dollar all at once would be tantamount to shooting themselves in the foot.

So for the time being, China has no choice but to play our game. But there are indications that they’ve decided upon a solution: a Global Shopping Spree. The idea, so far as one can ascertain, seems to be to spend as much as possible on commodities and hard resources (as opposed to “soft” resources, such as security-backed assets), thus converting their dollars (which they perceive as worthless) into tangible items (factories, coal, oil, etc.)

Once they’re satisfied they can simply dump their Treasury bonds, and provided they can stoke domestic consumption to make up for a decline in US consumption (we’ll all be poor by that point, remember), they should emerge as the undisputed economic hegemon.

From the article I link in the opening paragraph:

Late last month, PetroChina made a $1.9-billion bid for a majority share of two Alberta oilsands projects–a deal to buy a 60% interest in Athabasca Oil Sands Corp.’s MacKay River and Dover projects.

And also:

CIC made its first major investment in a Canadian company in July when it acquired a 17.2% stake in Teck Resources, Canada’s largest diversified mining, mineral processing and metallurgical company. Teck also holds a 20% interest in the Fort Hills oilsands project owned by Petro-Canada.

(CIC is the Chinese Investment Corporation).

China has also expressed interest in converting its dollars into US property assets:

As the CIC turns its attention to America’s damaged real estate assets, there is little information regarding how much the fund is willing to invest, but the potential firepower of the sovereign fund is huge. Some have suggested that it could be upwards of $10-billion (or more) by 2014.

And:

The CIC this year has invested money in a real-estate trust in Australia and bought an indirect stake in Canary Wharf Group in London. In addition, it has put some money into a global property fund run by Morgan Stanley. Clearly, China will continue to pour billions, if not trillions, of dollars into direct investments around the world.

I wonder how hard it is to learn Chinese.

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Written by pavanvan

September 16, 2009 at 6:19 pm

One Response

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  1. Buyers’ market for everything now. Cars, homes, companies, politicians… shame no one in the US thought to save a few bucks for this contingency.

    PJA

    September 17, 2009 at 3:40 am


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