Guest Post: Why China Is Holding All That Debt

Tyler Durden's picture

Via John Aziz of Azizonomics blog,

What does it mean that China is making a lot of noise about the Federal Reserve’s loose monetary policy?

 Via Reuters:

A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.


Asked whether he was worried about the dollar, the chairman of China’s sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: “I am a little bit worried.”


“There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place,” Li said.

At first glance, this seems like pretty absurd stuff. Are we really expected to believe that China didn’t know that the Federal Reserve could just print up a shit-tonne of money for whatever reason it likes? Are we really expected to believe that China didn’t know that given a severe economic recession that Ben Bernanke would throw trillions and trillions of dollars new money at the problem? On the surface, it would seem like the Chinese government has shot itself in the foot by holding trillions and trillions of dollars and debt instruments denominated in a currency that can be easily depreciated. If they wanted hard assets, they should have bought hard assets.

As John Maynard Keynes famously said:

The old saying holds. Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.

But I think Keynes is wrong. I don’t think China’s goal in the international currency game was ever to accumulate a Scrooge McDuck-style hoard of American currency. I think that that was a side-effect of their bigger Mercantilist geopolitical strategy. So China’s big pile of cash is not really the issue.



It is often said that China is a currency manipulator. But it is too often assumed that China’s sole goal in its currency operations is to create growth and employment for China’s huge population. There is a greater phenomenon — by becoming the key global manufacturing hub for a huge array of resources, components and finished goods, China has really rendered the rest of the world that dependent on the flow of goods out of China. If for any reason any nation decided to attack China, they would in effect be attacking themselves, as they would be cutting off the free flow of goods and components essential to the function of a modern economy. China as a global trade hub — now producing 20% of global manufacturing output, and having a monopoly in key resources and components — has become, in a way, too big to fail. This means that at least in the near future China has a lot of leverage.

So we must correct Keynes’ statement. Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed; owe him £1 trillion, and become dependent on his manufacturing output, and the position is reversed again.

The currency war, of course, started a long time ago, and the trajectory for the Asian economies and particularly China is now diversifying out of holding predominantly dollar-denominated assets. The BRICs and particularly China have gone to great length to set up the basis of a new reserve currency system.

But getting out of the old reserve currency system and setting up a new one is really a side story to China’s real goal, which appears to have always been that of becoming a global trade hub, and gaining a monopoly on critical resources and components.

Whether China can successfully consolidate its newfound power base, or whether the Chinese system will soon collapse due to overcentralisation and mismanagement remains to be seen.

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francis_sawyer's picture

China doesn't give a FF anymore... They LOVE the 'PM' price suppression [while they still own the franchise to sell trinkets for joobux]...


Bring it!

kaiserhoff's picture

I've always loved Scrooge.  The last few years have taught me why.

Manthong's picture

Looks like ol' Scrooge has about the right mix of hard pack and artificial to ski on.

economics9698's picture

The Chinese peasants are getting restless with that mercantilism shit. 

The Chinese government has recognized that “oh shit” moment when they realized the paper they are holding is a ticking time bomb.

So what is new?

It explodes just as well in China as it does in Europe.  Just because they are a modern fascist country does not change anything. 

Shizzmoney's picture

It explodes just as well in China as it does in Europe.  Just because they are a modern fascist country does not change anything.

I'm glad you realize that the Chinese Govt isn't actually maybe the worst run "communist" govt run in the history of forever.

China is "State Corportism", not Communist.......and all corporations go bust at some point.

So will China.

EnslavethechildrenforBen's picture

No one is dependant on China for anything.

Aziz has just been smoking too much pot lately.

aka Gil's picture

What about rare earth metals?

And it's nearly impossible for a self-directed adult to smoke too much pot.

EnslavethechildrenforBen's picture

That is why he said newly printed cash should go to the right place, he was warning the other central bankers that he is going to put it into Gold, Silver and Palladium and can start printing his new bills with nano-gold particles imbedded in their fibers any time he feels like.

jk about the pot, i'm pretty sure aziz does mushrooms

Random's picture

I hate those fuckers that go with the pot "insult". I guess they never tried it and are just talking out of their asses.

EnslavethechildrenforBen's picture

You don't need to smoke pot to notice that the stoners drive around all day with their emergency brakes on LOL.

oddjob's picture

says the guy on prescription drugs using his iphone and sipping starbux while driving.

EnslavethechildrenforBen's picture

 being accused of owning an iphone is insulting!

unrulian's picture

tried it many times...inhaled...never liked it...pot smoking employees and friends tend to be the laziest pieces of shit and long weekenders. in my opinion not just physically lazy but mentally lazy; answering all questions about their habits with your mind or you don't know you've never tried it...weak argument

Random's picture

I'll let you in on a secret: is not due to weed, they were/are lazy without it also. As of never tried it, well that is true, you talk about something without knowing it, hear-say, isn't that even weaker?

unrulian's picture

Are you high? if you have enough ambition to read it again, i said, tried it many times...common your mind.

blindfaith's picture

Homework is always a good idea.


There is nothing "rare" about rare earth metals.  What is rare is the ability to mine them cheaply, safely, and 'legally' (meaning within enviromental laws of a nation, not just the USA).  You figure out how to get them up off the ocean floor and you will own China.

Ghordius's picture

1. Bob has tons of my IOUs. 2. Bob has them because he gave me lots of things 3. Bob trusts me, but do I trust Bob? 4. Perhaps the only reason he collects my IOUs is because he does not want me to hit him. 5. Damn, I can't hit him, I still want him to give lots of hings. 6. Ah, he must be a fool to trust me and my spendthrift wife even more. 7. Anyway, I hope Bob breaks a leg while delivering my new things. 8. Bound to happen, the way Bob overworks himself. 9. Does him right, the bastard overachiever. 10. How I hate when a poor guy fights tooth and nail to achieve middle class status

Gazooks's picture

Bob's doin your spendthrift wife

SWRichmond's picture

"If for any reason any nation decided to attack China, they would in effect be attacking themselves, as they would be cutting off the free flow of goods and components essential to the function of a modern economy."

Just flat wrong. One major reason for American global dominance post WW2 was the fact that we had geared up to produce massively for the war, and all of that production was re-tooled for consumer goods. Plus the fact that the rest of the world's productive capacity had been flattened.

Now of course, the US has voluntarily flattened our own productive capacity through the looting process known as "financialization", the credit bubble increasing our craving for (cheap) useless consumerist Chinese junk. Everyone here is well acquainted with the forex / trade balance / debt mechanisms that swirl around mercantilism. But if we flattened China, or even just closed her ports (easy), that part of the problem at least would be solved. There is plenty of excess capacity elsewhere.

Always remember, submarines are weapons of denial.

JeffB's picture

I wonder if they ever considered our currency as a weapon of war.

If they started dumping $$ it would kick off some inflation... which would lead to higher interest rates (or hyper inflation).

That would cause some pain for U.S. & world citizens. If they dumped a lot pretty fast, it could potentially destabilize our economy in a very serious way.

Of course we made the ticking time bomb we're sitting on. Unfortunately, we've also given them the trigger for setting it off in exchange for all those trinkets.


FreeMktFisherMN's picture

Exactly. All those clowns who tout the notion that 'it's their loss' for giving us goods for our paper don't realize that those dollars we exported can come right back. The Chinese govt is corrupt obviously, but the bottom line is they are productive. They definitely build a lot of unwarranted things like ghost cities to spur GDP, which is one example why GDP doesn't tell of the valuable output (there is no way to aggregate data and get some 'national' output anyway, and I hate all these STATISTics) but they are producing things others are consuming, causing others to become debt slaves, and they get more and more leverage. The longer they can go on foregoing consuming their own productivity, the more leverage they'll have. Mercantilism is pure rent-seeking statism, but the bottom line is they are a creditor nation, and they are smart to be buying PMs and commodities, and we keep pissing them off by imposing sanctions on Iran, their main oil partner, and they don't need USD as they can trade grains and gold/barter for oil. The Japanese made the mistake of buying our debt, too, but they can cash those out as they are elderly and now are running deficits and send a tsunami of USD to our shores. 

Bottom line is prices are already going up way more than the govt would have us believe, but the prices will be skyrocketing as markets eventually impose discipline (even the Asians aren't buying our debt as much; Fed is buying 90% of Treasuries). The inflation and govt suffocating business  also has distorted the economy and not allowed us to have the industrial revolution we need to restore the economy to one predicated on savings and production.   So while obviously the Chinese middle class still lacks efficacy and freedom to pursue enterprise uninhibited, they are the savers, and it is not 'their loss' and that's it for trading their sweat and tears for our paper, because they continue to hold the cards, and it sounds like the conversion to real items of value is going on anyway, with their being known as buyers of PMs. It will be a race to hard assets, and they seem to have a head start.

CPL's picture

That stops as soon as they have enough gold to feel comfortable.  With the sabre rattling, they are almost at that point.  

francis_sawyer's picture

Frankly ~ I'm not sure 'when' it stops...


Put it this way... There are a lot of "STACKERS" here on ZH [who suck at boating]... Is anyone EVER 'satisfied'? [given the ongoing progression of events]?...

kaiserhoff's picture

Damn good thing we can swim;)

francis_sawyer's picture

I'll stop at 'dogpaddling'... But it's the EFFORT that counts...

RockyRacoon's picture

One can never have enough gold as it has infinite marginal utility.  Easy stuff.

AlaricBalth's picture

Always enjoy DoChen's musings. Thanks for the link Rocky.

nope-1004's picture

China may be a "hub for international trading", but the fact of the matter is that the low wages and substandard products they make (fucking garbage!!!) is the reason why my fridge only last 3 years, my dishwasher constantly plugs up, and my 7/16" wrench is actually 11mm.

Cheap stuff is cheap for a reason.  Dumbing down the world based on price for goods has created the illusion that the US is "smarter than that and has a more evolved economy with less labor".  Problem is that now "junk" passes as product.

I can go to a dump and buy garbage for less than China can make it, so I fail to see how the world got ahead by moving all manufacturing to China and dumbing down quality for price.


francis_sawyer's picture

my only question would be... WHAT IN THE WORLD would you EVER need a 7/16 or 11 mm wrench for, [when you could just buy a bitcoin mining card for your computer & all your worries would be solved]?...

nope-1004's picture

1/4" x 20 bolt on my garbage fridge require a 7/16" wrench.  I wouldn't need the wrench if I didn't have to fix the junk we are forced to buy from China.


RockyRacoon's picture

The point is, you toss it and buy another because it's so cheap.   My dad used to fix small appliances as a side-job when I was kid in the 1960s.   Toasters, mixers, electric drills and other stuff. Today you just about can't disassemble one without totally destroying it.  They aren't made to be fixed.  Can't even find discrete parts for most of this stuff.

Raymond Reason's picture

Shoes are another example.  Absolute crap. In many 2nd world countries, it's common to see shoe repair, because their shoes are worth fixing. 

JeffB's picture

The parts often cost more than buying a new replacement.

Ahmeexnal's picture

I'll trade you a 2TB hard drive for its weight in gold. You can store a gazillion bitcoins on that 2TB drive!
You'll be rich, bitch!

francis_sawyer's picture

lol ~ I'll even stoop for a faraday cage & a 20 gallon copper still with no leaks...

Orly's picture

Oh, my God.

Are you even serious?

francis_sawyer's picture

ZOMG (a hat tip to Trav)...


Look!... Now it's 'morphing' into GOLD vs. BITCOINS... Shalom Bernanke just breathed a heavy sigh of relief... ror

knowless's picture

i don't think he is.

Orly's picture

I sure hope not.

What does Trav777 (TM) to ZOMG?

francis_sawyer's picture

I'm a simple [photographic memory] type fool... Digging back into the basement library for microfiche to support my evidence ISN'T my idea of a good time... I pay 'cutie pie' CO-EDs to do that sort of work for me...

Orly's picture

I have no idea what you're babbling about.  I am certain it is some vulgar statement that only you and your mother could understand.


maskone909's picture

gotta log into my onion browser and fire up my silk road account so that i can score some more heroin from my dealer. tottally encrypted and secure of course. SHIZZAMMMM. wait i forgot i promised the wife i would go to costco and purchase those coffins they so conveniently display at the exit.. talk about bargains!

Half_A_Billion_Hollow_Points's picture




AWESOME; we have moved from "first they ignore you" to "then they laugh at you" in BITCOIN.


MEANWHILE, bitcoin's has risen around 50% in JANUARY alone!  It's now trading around $20.00.  


When it passes the price of silver later this year, there will be a lot of butthurt from these telletubies. 

Half_A_Billion_Hollow_Points's picture

AWESOME; we have moved from "first they ignore you" to "then they laugh at you" in BITCOIN.


MEANWHILE, bitcoin's has risen around 50% in JANUARY alone!

jimijon's picture

That is the effect of the inflation tax. Quality and quantity are always shifting lower.