

China, the cash triple trillionaire - elzr
http://www.economist.com/node/18560525

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derrickpetzold
Spain became ridiculously wealthy after its conquest of the Aztecs and Incas
at the beginning of the 16th century but by the end of the century it was
bankrupt. I am not saying that China would be as foolish as the Spaniards in
squandering their wealth but I am saying there is precedence for it and it
does seem like retaining wealth is far more difficult then creating it. Japan
would be another case in point. It will be very interesting to see what
China's strategy is. It does look like they are reaching the end of the road
on their current path especially with America's financial markets being what
they are.

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jcampbell1
The chinese have become wealthy because their people are producing more. Their
farms produce the same amount of food, while the children are making things in
factories. The world, and china, is richer because the chinese people are make
more of the things the world needs.

Filling ships full of gold can only make people temporarily rich. Investing in
gold is paying someone in south africa to dig rocks out of the ground and melt
them down, then paying someone in kentucky to dig a hole and store it. China
has contributed much more to the world than 16th century spanish gold thieves.

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louislouis
Holding $3 Trillion in boring American gov securities seems like a safe way to
shelter itself from price fluctuations if the FED decides to play with the
interest rates.

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jcampbell1
I can't tell if you are being sarcastic or not, but I'll bite. Price
fluctuations are of huge importance to the Chinese. They gave the US lots of
labor and their domestic savings in exchange for US treasuries. Now those US
pieces of paper buy a lot less of the things chinese people need (oil, food,
raw materials, etc.) than when they generated those savings.

China should have never bought as many treasuries as they did. They should
have bought harder assets, like oil company equites, timber and farm land,
mining equities. When they tried to buy an oil company, congress blocked them.
There is still no reason they shouldn't have bought diversified assets.

Providing cheap financing for US government during the 2000's, was neither
good for the US, nor for China. The US got an asset bubble exacerbated by the
cheap money, and the Chinese now have dollars that buy 1/2 as much as the
dollars they used to buy the treasuries.

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louislouis
Ok, so your overall point is that "Chinese now have dollars that buy 1/2 as
much as the dollars they used to buy the treasuries". But isn't this due to
inflation and the dollar becoming devalued due to sub-prime disaster and
overall global loss of faith in the US economy? Having the $3trillion in US
gov securities is still good because it still shelters it from price
fluctuations. So the cost of things made in China will still be cheap and
US/Europe will still import them. If the $3 trill had been invested in harder
assets as you suggests, the Chinese would have made a nice profit yes, but it
doesnt safe-guard its import/export industry.

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gvb
_China can buy almost anything for a price—but almost nothing for today’s
price._

In a way, they have become too big to _succeed._

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ChuckMcM
It is good to keep this in mind. China as VC of last resort? They could fund
the equivalent of the entire 1995 - 2001 tech bubble.

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barkingcat
No - China as VC means that the government takes over your company, and they
would own all your IP (ie give your ideas to "natively developed" companies so
they can compete against you with your own work). Would you want that to
happen?

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thebooktocome
GP did say "last resort." Sometimes it's more important that a thing exists
than whether or not you make a profit off it.

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shareme
No mention of the way China subsides its own banking system in such a way that
$3 Trillion in reserves is somewhat illusionary ..pet project disasters alone
are $1 trillion counting the high speed rail disaster..and that is before
factoring in the banks that China is holding up to prevent them from closing..

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louislouis
"the way China subsides its own banking system in such a way that $3 Trillion
in reserves is somewhat illusionary"

Care to expand on this a little bit? I don't quite understand

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jcampbell1
I'll make it simple.

Ordinary chinese citizens save $1T in bank deposits.

Bank loans the $1T to mall developers, and high speed railway developers. The
developers promise to pay the money back.

They don't pay the money back, because the mall is empty, and no one can
afford the high speed trains.

The people worry that the bank can't pay them back, all rush to the bank to
get cash.

The Chinese treasury uses $1T in USD reserves to stop the run on the bank.

So, what he is saying, is that the Chinese central bank is already on the hook
for about $1 trillion in bad bank loans.

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joe_the_user
A fine summary except...

.. what does a rice farmer in Northern China _do_ when the government gives
him 1000 crisp dollar bills ("or their electronic equivalent")?

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jcampbell1
He should go back to farming. He now knows he can spend the 1000 bills, or
gold coin, or whatever at a later date when he so chooses. When the time is
right, the $1000 dollars can be used to pay his daughters college tuition, or
buy a tractor. It doesn't matter, the only important thing is "when the time
is right." It is an economic mess when ordinary people can't time shift their
spending. This is why good governments guarantee deposits, and keep inflation
low.

