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Sunday, August 7, 2011

If America's good days are over, so are China's

If America's good days are over, so are China's

"Be careful with what you wish,” goes an old saying. “Because when it comes true, it may not be good for you.”
Everyone who follows closely US-Chinese economic relations cannot help but be puzzled by China’s bold statement, after the S&P downgrade of US debt, that “America’s good day’s over.“
While China, as America’s largest foreign investor in US Treasuries, has every reason to be concerned about the ability of the US to fulfill its credit obligations to its lenders, such statements are unfair and unjust, and are against China’s long-term interests.
China’s statement is unfair and unjust for a number of reasons: First, China’s credit to the US isn’t a direct loan negotiated under strict financial conditions, as is the case with IMF loans to heavily indebted countries, but an investment, the purchase of US government bonds in the open market. Second, it is assumed that China applied due diligence before it pursued such an investment, and determined that such investment was to the best of its own interests. If now China thinks otherwise, it can just unload its holdings, as any prudent investor would do in a market system. Third, in an era of low interest rate environment for dollar denominated assets, investing in US Treasuries has been a good choice to park dollars. Japanese, Korean, European, and American investors did that, and so did China—in fact those investors have fared really well in the last year. Forth, the dollars that China used to purchase US Treasuries aren’t hard saved money of the Chinese people, but money earned from selling Chinese goods to American consumers, which brings us to the second part of our argument."

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