US Financial Crisis/Bailout, China's Role

FugitiveVisions

Junior Member
No. I am only explaining China's past actions, not its future actions. And like I said, China has only maintained its Treasury holdings, from 480 billion plus to 515 billion plus in the last four years while its FOREX bloomed from well less than a trillion to nearly two trillion by now (over two if you count Hong Kong's).

At the same time, China cannot suddenly sell off its Treasury holdings just like that, it would be the equivalent of setting off a financial nuclear bomb, which can cause Treasuries to drop, the dollar to drop even faster, financial markets to topple, and the Domino effect means financial tsunami will hit China as well.

So expect to see a gradually trimming down of China holding US debt. Note the word "gradually". That means a net in favor sell offs versus new buys which you can expect China to continue.

point taken crobato, and i agree with you on the future course of action. but i do remember you saying not too long ago that the chinese economy had 'decoupled', which i believe was the word that you had used, and that it would be wisest to continue to invest the tbills.

what i see happening is that the US central bank is inadvertently becoming the old japanese banks in the sense that for Paulson and crew to have the funding that they would need to inject a bunch of capital to keep every single one of these systemically relevant banks (or nonbanks in the case of GM) alive, they would need to suck all the money out of the capital markets, which in a way is like the gov't borrowing on behalf of the banks from the capital markets. this kind of a developmental state simply does not work, because first and foremost they don't have enough buyers of tbills, and secondly, a centralized economy is an obvious and dangerous deviation of the economic foundations of the US. The gov't suddenly decides who gets money and who doesn't, and the next thing you know the smart investors are all taking their money to china.

huge freakin mess in the US and unfortunately for the world.
 

RedMercury

Junior Member
I've read that the capital injection is sort of a scam. This is how it works. The government injects capital charging low interest and pays for it with tbill sales. The corporations which receive this capital use the very same money to buy the tbill sales, but get higher interest. So basically money is being transfered from the government (making it more in debt) to the corporations.
 

crobato

Colonel
VIP Professional
Seems like the Big Three automakers needs to be bailed out. I don't know why American Express is applying for it.


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San Francisco Chronicle

Chinese stimulus vs. U.S. bailout

Wednesday, November 12, 2008

Compare the goals and the execution of America's $700 billion-bank bailout to those of China's $586 billion-stimulus plan: In America, the $700 billion was handed over to the Treasury with few rules and little planning. The money was immediately the subject of fierce lobbying by everyone from crumbling car manufacturers to a Hispanic business group that represents plumbing and home-heating specialists. So far, the chief recipients of the American package seem to be insurance-company executives who can't seem to stop sending their employees on luxury resort vacations. Oddly enough, the bailout has failed to loosen up the credit markets in any meaningful way.

Meanwhile, the Chinese government has been very specific about how its money will be spent: on tax cuts, infrastructure and social programs such as health care and education. Some begged China to use its foreign reserves to bail out the U.S. financial system. Perhaps China had a look at the feeding frenzy on Capitol Hill before declining: The Chinese are shoring themselves up against the global doom by investing in their own country's domestic needs. What a concept.

Of course, China's fiscal position is drastically different from ours. China's national savings rate was a breathtaking 51.2 percent of GDP last year. This suggests that while overcommitted U.S. consumers (we're the country with the negative savings rate, remember?) panic, China's best route to keeping itself afloat lies in developing its own domestic economy and encouraging the Chinese to be consumers. The government realizes that it will be helped in this pursuit if it offers people better health care and education. As a bonus, the government's spending on those things will keep the Chinese economy from collapsing at the very moment when other countries aren't so lucky. What a marvelous thing a crisis can be, when it's handled properly.

Many economists have pointed to the size of the Chinese package (China's GDP is about a quarter of the size of ours) to point out that, if anything, America needs to throw more money at the problem. They may well be right: Considering the depth of the crisis, this is no time for timidity. But what's even more important than the size of our bailout is whether the money is being spent wisely: as an investment that will help the American economy recover and eventually, grow. And right now, the signs coming out of both Congress and the Treasury aren't comforting.

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What a marvelous thing a crisis can be, when it's handled properly.

I'm sure we have all heard this, but-

"When written in Chinese, the word "crisis" is composed of two characters. One represents danger and the other represents opportunity."

-JFK

This is the golden oppurtunity for China to move away from an export-oriented economy dependent on foreign consumption to a balanced one driven by production and domestic consumption.
 
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crobato

Colonel
VIP Professional
but i do remember you saying not too long ago that the chinese economy had 'decoupled', which i believe was the word that you had used, and that it would be wisest to continue to invest the tbills.

I said it was decoupled from the US economy but the problem being the European and other Asian economies was going down. The US economy (Main Street) had been going down the last few years or so, and yet the Chinese economy had an opposite trajectory. And I said that US Treasuries was a more secure investment than stocks, or securities of investment banks. If I remember, you advocated buying up companies like Morgan Stanley.
 

FugitiveVisions

Junior Member
I said it was decoupled from the US economy but the problem being the European and other Asian economies was going down. The US economy (Main Street) had been going down the last few years or so, and yet the Chinese economy had an opposite trajectory. And I said that US Treasuries was a more secure investment than stocks, or securities of investment banks. If I remember, you advocated buying up companies like Morgan Stanley.

Actually, I was an advocate of buying a firm like Goldman Sachs, because they are the most likely to survive. Look, how can a firm not survive if it is owned by the Chinese government, which has close to 2 trillion in foreign reserves? LOL. Need financing? no problem. Have a liquidity issue? No problem. Redemption issues? no problem. Bad loans? no problem. Having strong backings in a time when other banks are getting eaten up would only help a firm like Goldman capture the capital market business in the States down the road. But I can see how such an investment would be perceived as a unduly risk in the short-term.

The fact of the matter is, China's marvelous expansion is a direct result of the fixed exchange rates, which promoted the exchange of goods by eliminating the exchange risk, and also her allowing a great degree of economic freedom. People often say that Reagan and thatcher are great champions of supply-side economics, it's actually Deng who created the most business friendly environment for a lot foreign capital investments. Whether investments continue at this pace is a function of the viability of both the Chinese domestic market and the international market.

Consider this: if the Chinese government set aside $130 billion of her foreign reserves in the dollar in a huge US bank account somewhere, so that every man, woman and child in China would get a $100 on a debit card that they can use to purchase anything in the US, don't you think that both the Chinese and the Americans would be better off? That's more purchasing power for the Chinese people, more buyers for struggling American firms, and the balance of payment would be held at a constant. But that is not going to happen, because the US government want that money in Tbills so they can use it to spend it on the war in Iraq or on social welfare programs. I'm obviously presenting an extreme scenario, but in a way, this is how capital gets crowded out in the US by the gargantuan spending budgets of the US government, and that's why this whole thing is going to fall apart.
 

crobato

Colonel
VIP Professional
Actually, I was an advocate of buying a firm like Goldman Sachs, because they are the most likely to survive. Look, how can a firm not survive if it is owned by the Chinese government, which has close to 2 trillion in foreign reserves? LOL. Need financing? no problem. Have a liquidity issue? No problem. Redemption issues? no problem. Bad loans? no problem. Having strong backings in a time when other banks are getting eaten up would only help a firm like Goldman capture the capital market business in the States down the road. But I can see how such an investment would be perceived as a unduly risk in the short-term.

But that's exactly the problem. The guys in the investment firm you just bought in thinks you just gave them a blank check. Consider you're paying for the opulent lifestyle of the executives. When you buy a firm, you don't necessarily buy the top management, you have to provide all sorts of opulent compensation packages to keep them on board. That's going to run into a major culture clash with the Chinese owners. When that firm you bought also becomes the target of numerous lawsuits down the road, which I expect to happen to many firms, guess who's going to pay for the costs and damages.
 
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crobato

Colonel
VIP Professional
Central govt to pay 25% of stimulus package.

China's central government will finance 25% of the US$586 billion stimulus package announced to boost the economy and offset a looming economic crisis, the South China Morning Post reported. The rest of the funds for the package will come from provincial authorities, corporate investors and bank loans, said a deputy director with the National Development and Reform Commission. Zhou Xiaoqiang said the majority of the package will go to infrastructure spending. The first wave of the stimulus package will run up to US$17.6 billion and will be designated for agriculture, water conservation projects, rural health and education and the rebuilding of areas affected by the Sichuan earthquake, Zhou said. He added that he hoped the initial investment would attract a further US$58.6 billion in investment from non-government sources.

from chinaeconomicreview.com
 

FugitiveVisions

Junior Member
But that's exactly the problem. The guys in the investment firm you just bought in thinks you just gave them a blank check. Consider you're paying for the opulent lifestyle of the executives. When you buy a firm, you don't necessarily buy the top management, you have to provide all sorts of opulent compensation packages to keep them on board. That's going to run into a major culture clash with the Chinese owners. When that firm you bought also becomes the target of numerous lawsuits down the road, which I expect to happen to many firms, guess who's going to pay for the costs and damages.

That's true. Here's a scenario though. How about if China acquires a holding company like Blackstone. As you know, there are a lot of political barriers to direct Chinese investments in American industry. So why not acquire Blackstone, where Pete Peterson has a great relationship with the mainlanders, and finance Blackstone buyout activities? I know there would still be a lot of barriers that would apply, but can you imagine China being able to get its hand on some engineering talent should GM get file for chapter 11? China in that case could funnel an equity stake in GM through blackstone to acquire some designs. That's just one narrow scenario though, and I'm sure there are better targets in tech firms in silicon valley.
 

crobato

Colonel
VIP Professional
Any firm you buy must fully disclose their liabilities. The latter is however a major accounting mess. If you bought into a company, the cost of the liabilities will fall upon you. That's where the true cost of the purchase comes in.

Well the thing is, banks and investment firms are now vying for the TARP, which is what the bailout package is now called. It seems that TARP is now fair game. If the Chinese bought the firms ahead, the firm might have a political barrier in obtaining TARP. See the headlines, US taxpayer's money used for bailing out Chinese owned company. Anyone from Bill Reilly to Lou Dobbs will have a field time.

If you want to buy a major investment firm, get it bailed out first and get its liabilities and losses under control with full transparency and accounting first. But even then, you are going to inherit overpayed execs with opulent compensation packages and the dubious feeling whether they're actually worth it or not.

I prefer buying small tech firms, or buying various technological licenses like you said.
 
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