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Will China Fund Uk Debt?


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The FT has reported that China has accused the USA of fuelling a global asset bubble.

Main points: A senior Chinese official (China’s chief banking regulator) warned that the US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, (...) that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. (and ) critical of US fiscal policy, urging Washington to spend less.

(...) Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery. (...) “[it] is boosting speculative investment in stock and property markets (...) “The situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices,” he added.

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As we know, China has been in a conundrum in this crisis. If the USA (and UK) markets gets weaker, China exports to the USA (and to us) suffer. But if the USA inflates too much, China huge dollar reserves suffer.

I have had the impression that China was undecided. But now, with a new asset bubble creating problems for them, looks like they have decided. See the FT article below.

I am trying to include this new info (Re. China) into my forecasts for the UK economy - for instance, re. UK Gilts market. After QE, the UK debt will depend heavily on Sovereign funds (who else will buy at current rates?), and the Chinese is one of the biggest (besides United Arab Emirates and Norway). It is no coincidence that Peter Mandelson visited its CEO when he visited China recently. This will influence the UK economy, via interest rates, and, consequently, house prices. Right?

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From the FT:

China says Fed policy threatens global recovery

( By Geoff Dyer in Beijing and Kevin Brown in Singapore. Published: November 15 2009 16:02 | Last updated: November 16 2009 02:14 )

The US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned on Sunday just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit in Singapore over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

“[it] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets,” said Mr Liu, who is chairman of the China Banking Regulatory Commission.

“The situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices,” he added.

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Full article here: http://www.ft.com/cms/s/0/760106de-cb07-11de-97e0-00144feabdc0.html

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  • 2 weeks later...

........

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

.......

If we move away from the idea that money, of itself, has value, and just focus on what it can buy, say the Chinese lend the US $100million at 3%p.a., denominated in USD. And say, today, when they make the loan, USD$10 billion is worth 2 million barrels of oil. So the Americans take the money and swap it for the oil. Their best strategy for the Americans to make "value for money" out of this deal is to let their currency weaken. Say the loan and interest come due in five years time, at which point the Americans pay back the $100 million, plus $15 million interest. Provided that the currency has weakened sufficiently so that the $115 million buys less that 2 million barrels of oil, the Americans will come out ahead.

When Mr Liu says the weak dollar "poses a threat to global economic recovery" the message I take from that is that China over estimated their influence, and certainly underestimated the American's influence, on the value of the dollar. Too bad - that's their mistake. They're left with holding American bonds which probably, by the time they are repaid, won't buy half the goods and services they could buy when the Chinese originally made the loans. Why should the Americans prop up their currency? In terms of repaying those bonds, the weaker the better.

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  • 3 weeks later...

Could be good or bad for us if they did.

Once we get out of this recession and have had some considerable recovery China will then push us into a deeper recession. Some manufacturing countries won't be able to contain the growth or count the cash fast enough, but consumer nations like UK will be hit the hardest.

Why will such a cash rich country collapse, same reason as many others in the past, revolution. There are around 1000 uprisings a day in China by oppressed people. China spends more money on military then any other nation, not due to overseas threats, but domestic. There will be a revolution, and we will be forced to back the oppressorive Chinese government in the name of self interest, other nations won't.

You decide would it be good or not?

Some examples of the oppression:

schools no longer free

hospitals no longer free

unemployed peasants not allowed in cities

no enforced employment law

land grabbing and forced evictions for new factories

the list goes on, and these only in the last 10 years!!!

Edited by jplevene
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  • 2 months later...

Could be good or bad for us if they did.

Once we get out of this recession and have had some considerable recovery China will then push us into a deeper recession. Some manufacturing countries won't be able to contain the growth or count the cash fast enough, but consumer nations like UK will be hit the hardest.

Why will such a cash rich country collapse, same reason as many others in the past, revolution. There are around 1000 uprisings a day in China by oppressed people. China spends more money on military then any other nation, not due to overseas threats, but domestic. There will be a revolution, and we will be forced to back the oppressorive Chinese government in the name of self interest, other nations won't.

You decide would it be good or not?

Some examples of the oppression:

schools no longer free

hospitals no longer free

unemployed peasants not allowed in cities

no enforced employment law

land grabbing and forced evictions for new factories

the list goes on, and these only in the last 10 years!!!

these are just assumptions. I must say ! China has a well established system of governance

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