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China: One Trillion US Bonds and Debt Scandal

According to a New York Times report in early September, the Chinese Central Bank has invested over USD $1 trillion on U.S. Treasury bills, bonds and debt securities. Among the one trillion dollar bill, $376.3 billion have been put into the mortgage backed securities of Fannie Mae and Freddie Mac, which constitutes 21% of the Chinese government foreign currency reserve.

Who's mistake?

Back in mid August, Lew Mon-hung, a representative of the Chinese People's Political Consultative Conference wrote in several mainstream newspapers in Hong Kong to criticize the investment decision. His opinion has been censored by mainland Chinese mainstream media, but distributed widely on the internet. Chenjian is among one of the mainland bloggers distributing Lew's viewpoint:

筆者謹以全國政協委員和金融界人士身份質問中央財金當局有關拍板人:你們這班敗家子哪裏來這麽大的膽子拿國家人民的錢,來買天文數字的「兩房」股票!現在「兩房」基本上已破產,你們如何向全國人民交代?
  
  一個國家的外匯儲備,並非這個國家的淨資產,當外資熱錢流走之時,外匯儲備就會下降。所以外匯儲備公認的投資原則是安全第一,分散爲宜。由此觀之,中國財金當局將外儲的百分之二十以上浪擲於美國「兩房」,是極其嚴重的錯誤

As a member of Chinese People's Political Consultative Conference and with my experience in the finance sector, I am here to question the decision makers at the central government finance sector: you guys are the family's failure, where do you get the balls to take people's money to buy such a huge amount of fannie and freddie's securities. Now they are bankrupted, how are you to take the responsibility?

A nation's foreign currency reserve is not the net income of the country, when hot money flows out of the country, the reserve will be reduced. That's why it is important to have safe investment, and it is necessary to diversify the risk. To put more than 20% of our foreign currency reserve on Fannie and Freddie, is a serious mistake.

中國光是 向「兩房」已投下相當於海内外給四川地震捐款一百多倍的外儲,如此側重美元資產,依據何在?眼光何在?如此離譜決策有沒有黑幕,人大常委會應立即組織特別 調查組應予徹查,追究責任!

The amount China invested on fannie and freddie is more than one hundred times of all the foreign donation to the Sichuan earthquake. What is the reason behind our policy on US investment? Is there any unknown secret behind such ridiculous decision? The Steering Committee of the People Congress should organize a special task force to investigate the issue and someone has to take the responsibility!

Conspiracy theory

Another article consisted of conspiracy theory that has also been circulated in forums and blogs, One World One Dream reposts the article in full.

中国经济学家都在干什么,受那些所谓主流经济学家提出的高论影响而实行的政策,最后使谁最终受益,使谁陷入深深窘境了呢?那些“主张对内狂引境外战略投资者、让其大赚贱卖的银行原始股;对外大力推出中国优质大型企业或国有垄断企业境外上市,向海外慷慨派送十倍于融资的分红” 的经济专家到底在干什么,他们的底细和真实身份到底是谁?

Where are our local economists? All these policies are leaded by the so-called mainstream economists, now who benefit from them and who are in trouble? Those who advocated “opening up for foreign strategic investors to our country and let them make profit through our cheap bank stocks; while on the other hand pushing our quality enterprises to list on foreign stock market and giving them more than 10 times financed capital gain.” What exactly they are serving? and who are they?

The writer urges netizens to re-post this article in official websites in order to warn the leader against such financial decision.

ASM is also on the side the conspiracy theory and maps out the steps on how the US government seized away fortunes from the rest of the World (zh).

China becomes a loser

Shi Hanbin, a local finance expert was interviewed by CCTV on the impact of US financial crisis on China on September 22. He further elaborates his viewpoint in his blog:

三个方面的影响。其一,次债危机导致美、欧消费需求下降,将降低中国产品的出口。无论是高附加值产品还是低附加值产品,出口的下降趋势都难以避免,当务之急是鼓励内需。其二,次债危机发生后,美元将继续贬值,目前的大宗商品都是以美元计价的,美元贬值意味着大宗商品价格上涨。同时,大批热钱在美元贬值或有贬值预期的影响下,会热炒大宗商品,推高石油、铁矿石等大宗商品价格,增加中国原材料的进口成本。其三,会对中国的资本市场和金融业带来影响,我国金融机构的损失会继续增加。同时,大批盘踞在中国楼市的热钱,会撤离。因此,绝不可以出台政策救楼市,救楼市的结果只能是让热钱高位逃跑,将对中国经济带来毁灭性打击。

Three major impacts are: 1. the sub-prime crisis will result in the decrease of consumption in U.S and Europe and will therefore affect our export. No matter it is high value added product or cheap product, the negative impact on our export is inevitable. We need to encourage our internal market. 2. As U.S dollars continue to de-valuated and our major transactions are in US dollars, which means the price of commodity will increase. At the same time, anticipating the US dollar devaluation, hot money will flow into commodity market, push up raw materials such as oil, iron and other mineral products’ prices. Eventually it would affect the cost of our import. 3. It will also affect our capital and finance market. The loss of our finance institution will continue to grow. Hot money from the property market will flow away. That's why we can't save the property market right now or we shall help the hot money to leave the market with higher profit rate and destroy our economy further.

Shi Hanbin also questions how the investment decision was made:

这些决策是怎么出台的?为什么许多决策对中国不利对外国反而是有利的。决策的不透明使人民丧失了基本的知情权和监督权,使得一些可怕的暗箱操作大行其道。

How such decision come into being? How come so many decisions are not good for China but let foreign country gaining interest? The lack of transparency in decision making has deprived the people from their right to know and to monitor. And everything operates in black box.

在次债危机中,中国的损失极其惨烈,因此,即使有机会,中国也只能眼睁睁地看着它流走,因为,我们的巨额资金被套或打水漂,我们已经不再是能够找寻并抓住机会的人,而是一个巨大的可怜虫!——在把数千亿美元的财富败了之后,最多也只能做个遭人唾弃的可怜虫了!

In this crisis, China suffers from serious loss. Even if there is opportunity, we can't do anything because our capital are locked in the investment. We become loser, after we lost thousands of billions we are doomed to failure.

Zhanghui noticed that after the first outbreak of sub-prime crisis in Europe back in August 2007, Chinese banks haven't reduced their investment in asset backed securities. On the other hand, there is a net increase of US$59 billion between August 2007 and May 2008. Now, European countries can say no to the US$700 billion “bail-out” proposal, but China cannot.

作为美国的机构债最大的持有人,中国现在不可能清空手中的债券,因为大幅抛售必然造成价格大跌,同时也没有人接盘,更会被美国人认为落井下石,损人不利己。中美两国其实在金融危机中的利益是一致的。某种意义上说,中国政府的支持是美国政府必须的,比西方七国更重要。

As a major holder of US debt, China cannot sell out their share because it would lead to a huge fall in the price. Besides no other countries and investors would buy the share. Such act is harmful to both sides. The two countries now have a shared interest in the financial crisis and it is necessary for the Chinese government to support the U.S government, more necessary than the G7.

Even though the Chinese and American government share the same interest in the crisis, many netizens feel it is a painful lesson for the Chinese. Here is another widely circulated opinion article quoted from Hong Kong newspapers (via dmxianfeng):

勤劳勇敢的中国人,固守千年古训,省吃俭用,多生产、少进口,多积累、少消费,多攒美元、少花美元,结果到头来却要为美国的金融危机埋单。而且,一边谦和地堆起笑脸纳贡,一边还要承受对方的傲慢和谩骂!这就是中国今天所面对的世界经济体系:谁执掌了金融的牛耳,谁就执掌了世界。这悲壮的一课,将给国人留下刻骨铭心的记忆。

Hardworking and courageous Chinese people, we follow our ancient teaching in saving everything we can save: we produce a lot and import very few, we accumulate a lot and consume little, we earn a lot of U.S dollars and spend little. But in the end, we have to pay the bill of US financial crisis. Moreover, we are paying the tribute with humbleness while the other side is full of arrogance! This is what we are facing in the global economy today: Who controls the finance institutes rules the world. This is a painful lesson and will leave an everlasting memory.

There are votes and comments at the China Daily forums on: Should the U.S. Congress pass the $700b bailout plan? Although it might not reflect popular opinion, it's still worth a look.

6 comments

  • I would rather see a $700 billion stimilus package than a bailout. With Bush’s bailout plan tax payers money would simply be taken out of the US Treasury and placed into the hands of the men who were responsible for the mess in the first place.

  • ronald trijber amsterdam

    I have kids and I try to raise them the best I can. One of the very clear rules: Stealing and lying are both no options. Not to be rewarded.

    This bailout plan is nothing but a plan for the rich AND responsible… every single dollar in the end has to be paid from the one and only wallet of importance: yours!

    How on earth do I explain all this to my kids??

  • Quentin

    I feel that we as people of the world community have finally come to a stage where we can communicate and stop all the lies that separate us and keep us devided. We now have one of the most powerful tools that allows us to communicate on a level and stop the lies that are being told to use by leaders with small minds.

  • […] The U.S. financial crisis has provoked much hand-wringing in China, which owns $1 Trillion of US Treasury Bills, bonds and debt securities. [link] […]

  • Freemanchen

    Honestly speaking, i have lost my patient in our government, lacking of enough intendance. The governor can always easily make a decision without passing any law process or agreed by public.

  • WHAT CAN I SAY! AMERICANS WORK HARD, LIKE YOU. OUR LEADERSHIP IS GROSSLEY FALTED, & I AM SURE IT WILL CONTINUE. AS IT WILL IN YOUR COUNTRY. WE WANT NOTHING MORE THEN ENJOY OUR HOME AND FAMILY. DO NOT REPEAT DO NOT JUDGE US BY OUR LEADERS. REMBER CHAIRMAN MAO. THINK THINK THINK. FROM A 68 Y/O MAN WHO HAS WORKED HARD FOR A LONG TIME. GOD BLESS OR WHAT EVER.

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