What should China buy with its $3.9 trillion reserves?

[LeveragedBuyout]

Oddly enough I never actually tracked individual performance. The companies as a whole did very well.
I was too busy building the trading systems. After a while all the numbers were just a blur and the PM's names were just text.

Based on the Blackrocks, Fidelitys, and Vanguards of the world, I would estimate the PMs that managed such gigantic portfolios had sub-par performance. It's virtually impossible to beat the market when you are the market, whether it's equities or fixed income. I'm not saying it's impossible for a PM to manage such a large portfolio. I'm saying it's impossible to manage it well, especially now that everyone and his dog is playing in the alternative asset arena. No more outsize performance there.

 

[Chinese-Dragon]

Based on the Blackrocks, Fidelitys, and Vanguards of the world, I would estimate the PMs that managed such gigantic portfolios had sub-par performance. It's virtually impossible to beat the market when you are the market, whether it's equities or fixed income. I'm not saying it's impossible for a PM to manage such a large portfolio. I'm saying it's impossible to manage it well, especially now that everyone and his dog is playing in the alternative asset arena. No more outsize performance there.

No doubt that is true.

However, in China's current system (which as we have discussed is often labeled state capitalism)... profits for investment funds and companies are not always the most important end goal. The end goal is benefiting China as a whole.

Though our currency reserves are one of the most controversial parts, people are generally not happy with the current state of the national currency reserves, which are increasingly being seen as a liability, by both the people and the government.

 

[OCguy]

US is not a bank. China will lose money and US will lose credit. Losing money is not big deal. Losing credit is a vital hit to US. Can you imagine a world in which dollar is not welcomed anymore?

Your understanding of a fiat currency, as well as how much the dollar effects everything else, seems questionable in this response.

And although the US is a bank in multiple fashions, in the analogy I quoted, China is the bank.

 

[Chinese-Dragon]

US is not a bank. China will lose money and US will lose credit. Losing money is not big deal. Losing credit is a vital hit to US. Can you imagine a world in which dollar is not welcomed anymore?

That is true. If we lost a trillion from our currency reserves, that would be a big blow, but we would still have more currency reserves than the rest of the world combined, at around $3 trillion.

Whereas if America was seen as being unable or unwilling to pay back its debts, its credit rating would sink, and borrowing costs would become exponentially higher. And since borrowing is such a fundamental aspect of the American economic model, the downsides for America would catastrophic.

So both sides would lose out, but our loss would be much more survivable.

 

[Dem!god]

china should not have invested so much in treasury bonds...its useless...
dollar is loosing its shine day by day and may be it will break the charm and will loose its value in a American debt economy...its only a matter of time when... and if this happens .all these treasury bonds will become useless...

i think this is the only reason why china want to invest before it turn garbage..

 

[Armstrong]

There is a saying here that came about due to citizen protections against debt collectors:

"If you owe the bank $500 and stop paying, you are in trouble. If you owe the bank $5,000,000.00 and stop paying, the bank is in trouble."

What that is saying is that there is a tipping point where the creditor has more to lose than the borrower should a default occur.

Thats partly true but the kind of hit your own credit rating is going to take no lender is going to touch your application for a loan with a 20 foot barge pole & if you're a heavily geared economy like the US is as is almost every country in the world - You're in for a serious mess afterwards - So its more of a symbiotic relationship than anything else !

 

[LeveragedBuyout]

US is not a bank. China will lose money and US will lose credit. Losing money is not big deal. Losing credit is a vital hit to US. Can you imagine a world in which dollar is not welcomed anymore?

OK, this is why it's important to remember what the foreign exchange reserves really represent. The RMB is pegged to the US dollar, so the PBOC must buy dollars to keep the RMB at a low value. Where does it get the money to buy these dollars? It sells short-term debt in the Chinese financial markets. The rest of the reserves are deposits by exporters who have made profits in foreign currency, or are speculative inflows from outsiders looking to invest in China.

The foreign reserves held on behalf of exporters and investors must be paid back, because they don't belong to the Chinese government. The debt that the PBOC raised on China's financial markets must be paid back, too. If the dollar devalues, let's say after a default, that would be a devastating blow to China, since the liabilities (what it owes to the speculators and exporters) wouldn't change, but the assets backing up those liabilities (the dollar) would plummet in value. The difference would either have to be made up through taxes on Chinese citizens, or the PBOC massively printing RMB, causing inflation.

Yes, the US would be devastated, but China would be greatly damaged, too. China should not hope for such an outcome, which is one reason why it seethes about the situation, but is forced to continue buying dollars (US Treasuries). There is no other market liquid enough or deep enough to absorb all of China's excess capital.

 

[Armstrong]

No doubt that is true.

However, in China's current system (which as we have discussed is often labeled state capitalism)... profits for investment funds and companies are not always the most important end goal. The end goal is benefiting China as a whole.

Though our currency reserves are one of the most controversial parts, people are generally not happy with the current state of the national currency reserves, which are increasingly being seen as a liability, by both the people and the government.

Give me 0.9 trillion of the 3.9 trillion if you're not happy with the national currency reserves !

Why not make a Scandinavian country like Pension or Social Security Fund out of it for the common Chinese ?

Or why not use it as an interest free loan to be given to the common Chinese as long as they give it back to one of a list of approved firm of investment who invest it in a portfolio of investments for them & give them the extra income from there while simultaneously paying off the initial capital in due time back to the national reserve currency account ?

Increased prosperity....more jobs for the Investment Industry & a good usage of otherwise idle resources ?

Or something else - Use your imagination !

 

[LeveragedBuyout]

No doubt that is true.

However, in China's current system (which as we have discussed is often labeled state capitalism)... profits for investment funds and companies are not always the most important end goal. The end goal is benefiting China as a whole.

Though our currency reserves are one of the most controversial parts, people are generally not happy with the current state of the national currency reserves, which are increasingly being seen as a liability, by both the people and the government.

On the foreign currency issue, we agree. On how it should be used, I guess we disagree. I think that forcing state institutions to focus on profit will benefit all of China, since it will force the capital to be efficiently invested in projects that return more than the cost of capital. I can see an argument for using state capital for unprofitable projects for strategic reasons, but I don't think it should be the primary use of the funds, or at least not for the long-term.

 

[Armstrong]

On the foreign currency issue, we agree. On how it should be used, I guess we disagree. I think that forcing state institutions to focus on profit will benefit all of China, since it will force the capital to be efficiently invested in projects that return more than the cost of capital. I can see an argument for using state capital for unprofitable projects for strategic reasons, but I don't think it should be the primary use of the funds, or at least not for the long-term.

Profit - that sounds like Capitalism !

@Chinese-Dragon & I are ardent Socialists; he may say that he isn't 'cause Mrs.Dragon is a Capitalist & you know how one has to follow the wife's line after marriage but in his heart he is !

 

[Chinese-Dragon]

There is no other market liquid enough or deep enough to absorb all of China's excess capital.

And by the same token, there is no other creditor in the world as large as China. As @Armstrong pointed out, it is a symbiotic relationship.

Thus my confusion at the quote below:

There is a saying here that came about due to citizen protections against debt collectors:

"If you owe the bank $500 and stop paying, you are in trouble. If you owe the bank $5,000,000.00 and stop paying, the bank is in trouble."

What that is saying is that there is a tipping point where the creditor has more to lose than the borrower should a default occur.

This may work for an individual, since an individual can still survive easily, even if no one in the world is willing to lend them money.

However, that doesn't apply to the American government, which runs on debt. America currently has the world's largest annual deficits, and the world's largest debt.

If nobody is willing to lend you money anymore (except at loan shark rates), then how will these enormous deficits and debts be financed every year?

China would take a big economic blow, however we will still be seen as reliable and able to repay, and would still be able to borrow at normal rates.

 

[LeveragedBuyout]

And by the same token, there is no other creditor in the world as large as China. As @Armstrong pointed out, it is a symbiotic relationship.

Thus my confusion at the quote below:



This may work for an individual, since an individual can still survive easily, even if no one in the world is willing to lend them money.

However, that doesn't apply to the American government, which runs on debt. America currently has the world's largest annual deficits, and the world's largest debt.

If nobody is willing to lend you money anymore (except at loan shark rates), then how will these enormous deficits and debts be financed every year?

China would take a big economic blow, however we will still be seen as reliable and able to repay, and would still be able to borrow at normal rates.

Agreed, the US and China are in a tight embrace. That's why, despite the sometimes heated rhetoric, I think we will have fairly good relations over the next few decades. We need each other, even if that angers our respective nationalists.

And I agree with you about US credit. The US must defend its reputation and credit at all costs, or we will face decades of decline, like another deadbeat, Argentina. That said, if the US defaults, it will make the financial crisis of 2008 look like child's play, and no one will come out of it looking good.

 

[Armstrong]

Agreed, the US and China are in a tight embrace. That's why, despite the sometimes heated rhetoric, I think we will have fairly good relations over the next few decades. We need each other, even if that angers our respective nationalists.

And I agree with you about US credit. The US must defend its reputation and credit at all costs, or we will face decades of decline, like another deadbeat, Argentina. That said, if the US defaults, it will make the financial crisis of 2008 look like child's play, and no one will come out of it looking good.

The US won't default 'cause you can always print more dollars to pay-off the debt & the 'reserve currency' of the world that it is isn't going to loose its value any time soon; the worst it'll probably do is that it'll lead to Inflation !

I think it might already have; on my recent trip to the US I found it at least twice (if not more) expensive than I found Singapore in my previous year's trip !

 

[kankan326]

OK, this is why it's important to remember what the foreign exchange reserves really represent. The RMB is pegged to the US dollar, so the PBOC must buy dollars to keep the RMB at a low value. Where does it get the money to buy these dollars? It sells short-term debt in the Chinese financial markets. The rest of the reserves are deposits by exporters who have made profits in foreign currency, or are speculative inflows from outsiders looking to invest in China.

The foreign reserves held on behalf of exporters and investors must be paid back, because they don't belong to the Chinese government. The debt that the PBOC raised on China's financial markets must be paid back, too. If the dollar devalues, let's say after a default, that would be a devastating blow to China, since the liabilities (what it owes to the speculators and exporters) wouldn't change, but the assets backing up those liabilities (the dollar) would plummet in value. The difference would either have to be made up through taxes on Chinese citizens, or the PBOC massively printing RMB, causing inflation.

Yes, the US would be devastated, but China would be greatly damaged, too. China should not hope for such an outcome, which is one reason why it seethes about the situation, but is forced to continue buying dollars (US Treasuries). There is no other market liquid enough or deep enough to absorb all of China's excess capital.

What if RMB itself becomes a world currency? It's not too far to be seen anyways. I think it's a more lethal change for US

 

[ShahidT]

buy fertile agricultural lands from other countries or littoral states. in the future a healthy water table and arable land will be much more valuable than the paper stocks and derivative-ponzy based economic numbers of today.