Saturday, February 14, 2009

China Should Lend More To Emerging Asian Nations


Things do get lost in translation. When I read what Luo Ping said about the USA and its currency. Luo Ping is the director-general at the China Banking Regulatory Commission. I am not laughing at his English, but its really quite funny. Luo must have gotten good laughter as he mentioned the following in his speech in New York yesterday:

"Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. for everyone including China, it is the only option."

Eeerrr, Mr. Luo must have gotten a bit exuberant. There are plenty of things you can hold besides US Treasuries. Yes, I agree that you will need to hold a substantial sum of Treasuries in order for the global economy not to collapse overnight, but a better way would be to reveal a long term plan to bring down US Treasuries from say 80% of your portfolio to 70% by end 2011 and to 60% by 2015. This way everybody knows there is a strategy in place. Its not impactful immediately because its out there in the horizon, but at least the US would know for sure they really, really have to get their house in order or face a huge currency depreciation. Right now, everybody thinks the US dollar will depreciate, even Obama and Geithner, but it will probably not happen in a drastic fashion as in their minds they still think the world needs US more than the US needs the rest of the world. Thus most top dogs in US government do think that, while it may not be financially prudent or wise, the rest of the world will continue to lend to the US in the forseeable future even though they may be screaming and kicking.

Not being able to hold Japanese govenment bonds? Where Mr. Luo got that from, of course you can, just not so much. Let me give China a great idea:
LEND TO EMERGING ASIAN COUNTRIES IN THEIR OWN CURRENCIES
Since China loses so much money in Treasuries on currency movements, plus that move tends to encourage bad behaviour by US consumers... they just consume and consume and no savings. Why not encourage emerging countries in Asia instead, I am sure they will give you a better bang for your buck.

You can lend the equivalent of $20bn each to Malaysia, Indonesia, Thailand, Vietnam ... and US$10bn to Cambodia, Laos, Bangladesh... by holding bonds in their local currencies. Hence these countries will pay back to China in local currencies as well. These bonds will be for a 6 year period, with interest payments being zero for the first year, and then benchmarked to the prevailing local BLR for the rest of the 5 years.

Why should China be so generous? One, it adds to proper investing in a broader consumer base. Two, it add more economic might to Asia as a region by having more robust FDI and consumer base. Three, it will help cement stronger ties with China with the rest of Asia. Four, this is exactly the role that China should be stepping into to assume the future economic leadership and influence. Five, it allows for a kind of currency swap arrangement with smaller countries, which will allow for better depth and protection to emerging markets' currencies.

Seriously, China will not and should not look for the money to be repaid but rather "refinanced" at the end of 6 years PROVIDED these countries have shown that they have invested most of the funds properly. Yes, the countries may have to "kowtow" a bit to China, but hey, thats the money politics and business pragmatism that we all know so well. The idea may sound well on paper but these smaller nations will need to convince themselves that this is the right thing to do as well, instead of letting natinalistic fervour and narrow-mindedness destroy this idea.

Back to Mr. Luo's speech in New York:

"We hate you guys. Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

You gotta love the guy. From the text of his speech, obviously he meant nothing venomous by his use of the word "hate", it was probably well used to lighten up the situation and probably elicited much laughter.

p/s photos: Amy Fan Yip Mun

9 comments:

walla said...

The only reason China would buy US bonds is so that the US will buy more China goods.

Why should China buy Asian bonds when Asian countries will not buy China goods in order to protect their own producers in similar price domains?

Salvatore_Dali said...

Please read the posting on Feb 5, Friday on Decoupling of Markets... look at the two charts:

emerging markets exports to China has rise from 10% to 15%

emerging markets trade to each other has been gaining ground at the expense of trade with US...

doesn't that disqualify what you just said... I am not saying China should stop trading with the US, but to hedge their bets... isn;t it better to have many big demand markets than just one... if you have just one, you will always be a slave to it... by encouraging smaller nations, China will be less at the mercy of US consumers, it would be silly not to do so..

Kris said...

Lending to government may not be such an effective idea, since you don't for sure that the money will trickle down. Instead a better a way is to provide seed money or loans to Chinese entrepreneur to invest in the said countries.

"To grow the best corn , you need to give the best seeds also to your neighbours" - I bet you heard this story before.

DanielXX said...

In that sense, China should buy Euro bonds cos Europe is actually a bigger destination for their goods than the US.

Chan Kwang Yew said...

Hi Dali
Is the recent agreement between Malaysia and China to swap Rm40 billion for 80 billion yuan can be taken as a move in this direction ?

walla said...

are you sure that 10-15 percent wasn't more from commodities, i.e. raw materials, than from finished goods?

you still haven't answered the question posed.

why not suggest what it is, for instance, that Malaysia has been able to export to China in terms of finished goods? garments? electronics? furniture? keropok? funds management services?

who doesn't want big demand markets? that's always a good horse to bet on. But what's the real situation in the emerging markets?

that, you should try to answer; maybe we can then learn some new insights there.

rask3 said...

Hi,

Good suggestions. Money has many uses and if you don't lose it, most of the other alternatives are good. Why lend to the US without limits when u know the risk increases if you keep it up?


How about investing in real assets and businesses both within China and outside? Surely the living standards of most Chinese are in need of improvement.


And many prime assets around the world will be up for sale in the near future, if things go the way many fear it will. China is in a position to hasten this process. Just sit out a few US T-Bill auctions. That money can be put to better use.


Rask

Salvatore_Dali said...

walla,

what do u mean asians are not buying china products????.... where you get the info... it is very difficult to protect yr own product against china... who can do that??? which tariff are u referring to??

steel dumping?? car duties in malaysia??
do u know what the ramifications of steel dumping every few years on small producers... every country has tariff and protectionism... the USA is a big culprit... check the farm subsidies...

pls cite actual examples when u say the rest of asia does not buy asian goods

----------

rask,

i think gov to giv may see some leakages and ineffective use of funds... I think a special vehicle in the mode of CIC should be set up... but as a private equity vehicle to invest in private entities and/or fund entrepreneurs, and/or invest in approved local private equity funds.

I dont like the idea of China buying real estate as that is an ineffective use of funds and just like GIC of Singapore, it brings out nationalistic protests...

see said...

How much of those exports to china from emerging markets is input for final exports to US? The key question is how much of China's GDP is from domestic consumption. THats something economists are still wrangling with. Until you get a sizable domestic consumption then can talk about decoupling

I suspect China will increase its investments in strategic assets eg food resources, commodities, etc. Watch out for coming newsflow of M&A of China buying resource companies from say Australia or Indonesia or even Africa. Unfortunately it may not be listed companies they buying so stock market may not benefit directly but sure as hell better than putting more money in Treasuries.

US has always been culprit & hypocritical in many things. Oil price spike? Blame it on China & India when US is THE biggest oil consumer on the planet. Geithner says China manipulates their currency yet they have Buy USA Only clause in their stimulus.