This is Getting Complicated

Overnight, it seems that China has decided to speak publicly on its US debt holdings.(article here) China’s Premier Wen Jaibao was quoted as being “a little bit worried” about his country’s US debt holdings. This seems a fair statement given the past year and a half where we have seen the US government pour nearly $10T into what seems a bottomless pit of bad debt, corporate rescues, and bankers in trouble- by no one’s fault but their own. (The real bummer of being a banker in financial trouble is that you have no recourse to say, “I couldn’t have known.” Because if bankers do not know, how do they give us financial advice?)

 Unfortunately, all that I can say to Premier Jaibao is, “Join the club.” Now I do not mean that disrespectfully, but rather say it in solidarity. In fact, I will go out on a limb and speculate that he may have said this only because it reflects a widely held opinion. He could lose credibility if he did not say this.

An important difference between Premier Jaibao and myself is that I am not holding $1.95T USD in reserves. From a financial viewpoint, it seems irresponsible to hold such an undiversified portfolio. However, considering the undercurrent of a teetering superpower being confronted by an ancient culture that is once again an emerging superpower, and you have the brewings of political intrigue not seen since the cold war. It is a mix of international finance, political economy, international security and power. China’s holding of US debt gives it a strategic advantage in many ways. On the other hand, China’s economy and its national reserves are symbiotically enmeshed with the US economy- also seen as its strategic rival.

Figure 1. China’s USD Foreign Currency Reserves (in USD B)

getting-complicated-chin-fx-reservesSource: Chinability (http://www.chinability.com/Reserves.htm)

Frankly, I am not sure if I should turn to Henry Kissinger or Dr. Phil for help analyzing this relationship. However, a couple of things I am pretty sure about are that the struggle for international power remains with us today and in the foreseeable future; and the US China relationship will only get even more complicated going forward.

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