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China: One Trillion US Bonds and Debt Scandal

Categories: East Asia, North America, China, U.S.A., Economics & Business, International Relations, Politics

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:


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:


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:


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.


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.


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):


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? [1] Although it might not reflect popular opinion, it's still worth a look.