So I’ve received several emails about a comment from Lueo Ping, an official over at the China Regulatory Commission. He admits that investing in Treasuries is stupid but sees it as the only available safe-haven. Here is my Mises post about it.
Here’s why his viewpoint makes sense from his perspective:
1) None of the Chinese policy makers wants to reinvent the international financial order. Many different officials — including most recently, Hu Jintao, have gone on the record saying this. Peaceful rise. Soft power. Panda, not dragon, image. Team player. Friendly neighbor. Kapisch?
2) Gold. Look, I am all for of metal-based currencies and think currency markets should be completely liberalized (as discussed by Selgin). And while many Chinese policy makers have moved towards privatization and free-markets, even a gold-exchange-peg is probably not going to happen any time soon. Anywhere. This decade.
3) In large quantities, gold is not very liquid. Commodities are not very liquid. Treasuries are extremely liquid. Don’t believe me? Try dumping $100 billion of zinc or copper on the market and see how long it takes to find a buyer. Conversely, Chinese central bankers could theoretically dump all of their Treasuries in an hour (okay, maybe two after telling Team Obama to find a new Uncle).
4) Other commodities. Look, from a libertarian point of view it is no bueno for any government to be purchasing anything. However, they all are, including the PRC. Various governmental departments are in fact, taking advantage of the market reallocation process (deflation) by purchasing large amounts of commodities. For instance, the NDRC is filling their strategic petroleum reserve with relatively cheap oil (of course it should be sold off like Murphy suggests). And they are trying to get private firms to store as much oil as well. In addition, other state-owned-enterprises are stocking up on various bottom-dollar, top-shelf metals like aluminum and copper. Yet again, if you are going to complain that they aren’t buying gold or silver, then you can’t complain when they buy other commodities. At least they aren’t propping up the housing market or insolvent banks!
5) Like Jim Rogers, Lueo Ping recognizes that there really aren’t any safe fiat currencies (the irony!). It’s not so much that the dollar or US Treasuries are good, it’s just that for the few months, the Benjamins are not as bad as the other guys (Ruble, Korean Won, Pound). Sure in a libertarian world a government would simply cut a check to the taxpayers for these assets, but that’s just not going to happen.
6) Why aren’t they worried about hyperinflation? I’m sympathetic to what Bob Murphy, Shostak, Faber and Schiff are forecasting. However, there will not be hyperinflation today. Tomorrow. And probably not this year or even next year. The Fed is not purchasing massive amounts of Treasuries yet. Banks are not lending out the new credit they’ve been sitting on.
In ever country where it has occurred, it will be painfully obvious hyperinflation is taking place (e.g., autumn of 1923 Germany, Zimbabwe 2008). While having a metal commodity is useful, having canned goods, a baseball bat and a rottweiler would probably be better investments for those wanting to tough out the apocalypse. In addition, having a passport would also be a good investment (get them while the lines are short, right?). Thus, Lueo Ping is buying the rumor, selling the fact.
7) Robert Mundell. Sure he is no Salerno or Klein, but he’s better than Friedman and dare I say Krugman? And he even has their trust. Some even like him. So he’s probably as good as advisor a libertarian could hope to have in the PRC. (Someone even liked Schiff’s book). See: “This message brought to you in part by Noodles.”
8 ) The Yuan. It is not an international currency. It is still pegged to the dollar which puts them in a bind for now. However, Chinese policy makers are implementing trial phases with yuan-based settlements with foreign trading partners. See this story and this story.
9) Currency reserves. Of the roughly $7.4 trillion ducats held by foreign central banks, about 70% is denominated in USD ($5.2 trillion). While China represents about 20% of that number (~$1.4T in USD, $600B in euros), they are not the only guys propping up the system. The fact that they are (temporarily) supporting a zombie will assuage the fears of others, who will not dump or convert their assets to something else. So before calling them boneheaded, everyone else is still drinking the same juice. No one of consequence is dropping the dollar right now. Sorry, world citizens!
10) Smart? I couldn’t say how long they will long-the-bond or stay in the dollar-peg game. Last spring there were reports of how Chinese policy makers were furious at the depreciation of the dollar. That Chinese finance ministers chastised the Bush administration for running huge deficits and for a decades long weak-dollar policy. While they might not be hard core Rothbardians, I do not think they are stupid. To better understand Chinese thinking, I highly recommend K.Y. Leong’s piece “China’s Benign Neglect Pays Off.”
See also: Did exchange rates cause the bubble?
Why Mish is wrong about China
Long on China, Short on the United States