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China thought of the day
China has given us a ton of stuff in exchange for t-bills. If they expropriate US or other rich country FDI, the US cancels their claim to the t-bills and we get the stuff for free. That is to say, China's huge reserve holding of dollars is just collateral against any appropriation of the FDI being done there.
Here is more.
Posted by Tyler Cowen on July 7, 2007 at 08:01 AM in Economics | Permalink
Comments
One reason we can issue so many t-bills is that the buyers believe we will repay. If there is any real doubt, for example the buyers fear we may expropriate their holdings, then we don't get as many buyers, rates, rise, etc.
Posted by: richard at Jul 7, 2007 9:20:21 AM
... and then the Chinese will take all Americans living in China as hostages and then the US government will bomb Beijing and then the Chinese will retaliate by attacking Japan and then ... Tyler, what is wrong with macroeconomics?
Posted by: Edgardo at Jul 7, 2007 9:48:33 AM
And then, after all the claims have been cancelled, the Chinese end up with thousands of spanking new state-of-art factories and infrastructure, while we end up with billions of of furry toys and Ipods. Good deal!
Posted by: brm at Jul 7, 2007 12:09:43 PM
Edgardo: I think the problem is with you. Tyler's point is that China would be crazy to expropriate foreign FDI, knowing the possible consequenses. He does not argue that the consequenses themselves would be good for the world, if they were to actually brought into existance. You have to think one step further.
Posted by: Erik at Jul 7, 2007 12:11:46 PM
Erik: whilst not disagreeing with you, I think you should take some of your own advice and "think one step further". Imagine China's leadership faced with a major economic crisis - let's say the state-owned banking system collapsed. This far-from-unlikely scenario would have dire political consequences for a government that derives its legitimacy to rule from an (assumed) ability to deliver improved living standards to its people.
What would the Chinese government do to stay in power under such circumstances?
Posted by: Jimmy at Jul 7, 2007 12:49:48 PM
Is this what actually happens in real life? We have numerous examples of countries expropriating FDI -- especially in energy. How often do Western
Government actually freeze or claim their foreign exchange reserves?
I'm no expert, but I do not think it actually works this way. For example, have we done anything to the Russians for the way their government took over oil companies with large minority foreign positions?
Posted by: spencer at Jul 7, 2007 1:25:39 PM
The ability to expropriate and make it stick depends, in part, on two elements: the specificty of the assets in question (mines and steel plants versus software shops) and the relative power of the sovereign doing the expropriating, that is to say, its international autonomy, in this case, significant if the leadership is capable of a domestic crackdown.
Posted by: Roland at Jul 7, 2007 2:36:20 PM
Jimmy: I think you have a point, but it does not really concern the point I was trying to make in my post. I was merely stating that Edgard's insinuation that Tyler was in some way longing for a new world war was uncalled for, because that was not Tyler's point at all. Wether the consequenses Edgard mentions would actually take place in a real world setting, and under which circumstances, I do not yet have an opinion on. Does the risk of mutual suicide outweigh the benefits of trade? I feel that the lack of data and the extreme complexity of the issue make it very hard indeed to make any certain predictions at all.
I will, however, point out that it seems to me that your scenario is not reliant upon the existance of t-bills. A country undergoing economic growth will naturally increase it's military capacity, making it more of a threat in technical terms. The increased living standard can indeed become considered natural aswell, leading to civil unrest if it is not forthcoming for a couple of years. Such a situation could produce a desperation among the leaders of the country that make them take actions that they know will lead probably lead to disaster and war. However, if they are willing to take such risk, maybe even deliberately calculate with it, they can do that without t-bills as an excuse.
I don't know if I'm missing something.
Posted by: Erik at Jul 7, 2007 4:23:30 PM
Erik, you misundertood what I said. Tyler just made reference to an idea from a paper written by three known macroeconomists and my idea of a chain reaction was just to show how ridicule the idea of these three macroeconomists was. The problem here is why to pay attention to what macroeconomists are saying. This is a field of economics where no new ideas have been produced in the past 25 years (fyi, I used to teach macro for graduate students in the 1970s and early 80s).
Posted by: Edgardo at Jul 7, 2007 5:21:52 PM
Who would be dumb enough to carry out nationalization of foreign assets and actually openly call it that? There are far more subtle ways to go about it nowadays.
For instance, there's "soft expropriation" of the sort pioneered by Russia via heretofore unknown environmental regulations and newly-discovered unpaid taxes. There's also privatized expropriation and wealth transfer through litigation, pioneered by the US. Where is your WTO now?
Tomorrow's headlines: US pet owners bring class action suit against China; jury awards $1.2 trillion for emotional damages; after lawyers' fees, each plaintiff gets a box of Fruit Loops cereal. Income tax windfall almost balances the federal budget for one year. China subsequently discovers that US patents, copyrights and trademarks don't say "Simon says"; in other news, now-former pirate companies are the hot new Shanghai stock exchange IPOs; chiPods preloaded with every song ever recorded are a big hit with consumers. It's a win-win! Film at 11.
Posted by: Anonymous at Jul 7, 2007 5:28:10 PM
There's a practical problem with canceling China's dollar assets: The enormous secondary market in T-bills means that China can easily sell them to some third party who could redeem them at face value. I can't think of any way to close this loophole without effectively shutting down all trade in T-bills, which has enormous negative consequences for the U.S.
Posted by: Ammianus at Jul 7, 2007 5:33:12 PM
Edgardo. Then I did indeed misunderstand you. Sorry.
Posted by: Erik at Jul 7, 2007 5:45:06 PM
Ammianus -- Aren't the T-bills numbered in some way? The specific issuance time and such..
Posted by: ralph ruben emmers at Jul 7, 2007 11:06:57 PM
It's not exactly clear to me why the US government should do *anything* were the Chinese to nationalize foreign investors' assets. My understanding is that investors demand a risk premium that prices in these possibilities. When normal people expect the government to bail them out if their investments sour, it's called "moral hazard." What am I missing?
Posted by: chris at Jul 7, 2007 11:55:11 PM
Chris -- it's their central bank that's buying them.
Posted by: ralph ruben emmers at Jul 8, 2007 12:08:44 AM
I believe that Chris means that if the Chinese were to nationalize American funded factories/capital investments, why should the American government bail out those who invested in the factories. I think it's a valid question. You rolls the dice you takes your chances.
Posted by: fustercluck at Jul 8, 2007 12:19:13 AM
Continue to borrow huge sums of money from the Chinese; at some point in the future, China goes militarily for Taiwan. Make them forgive all of the debt as the cost of looking the other way about it.
Posted by: winston l at Jul 8, 2007 12:49:34 AM
So the individual American investors are taking a risk, while the government has protection from it by canceling the Chinese central bank owned T-bills.
That seems like a win-win situation for the Americans to me. The benefit of making a profit from investing with risk premium included, and the US govt as a sort of insurance, with the possibility of reimbursing investors when they nationalize.
Posted by: ralph ruben emmers at Jul 8, 2007 1:15:50 AM
Does anyone actually believe that China will ever (save for the DPP going REAL nuts) militarily invade Taiwan? It's far more likely that they'll just make a deal, like HK. What's the point of invasion? You'll blow up all the stuff you want to own and make all sorts of enemies.
Posted by: Klug at Jul 8, 2007 4:04:25 AM
Erik, you say:
"Tyler's point is that China would be crazy to expropriate foreign FDI, knowing the possible consequenses."
My point is that circumstances do not remain static. At present, when everything's going swimmingly regarding China's emergence as an economic superpower, seizing foreign-owned assets would indeed be "crazy". However, should circumstances change (like in the way I detailed above) the consequences for China's ruling elite of expropriating foreign FDI may well be severe, but they might well be rather less severe than not doing so. Of course, the US will respond to such an action, but how? Kim Jong il makes these kinds of rational actor calculations all the time.
Posted by: Jimmy at Jul 8, 2007 11:41:05 AM
My guess is that this post would seem really insightful, whether or not I agree with it, if only I knew what the author meant by "FDI".
Posted by: Peter K. at Jul 8, 2007 12:41:06 PM
FDI = Foreign Direct Investment.
Again, as Chris pointed out, why would/should the American government do anything were privately funded enterprises to be seized by the Chinese government?
I don't think we should be imperiling the American economy by delegitimizing T-bills were some Intel semiconductor factories to become nationalized. It seems to me that would be Intel's problem, not the American taxpayers'.
Where are you utopian libertarians on this issue?
Posted by: fustercluck at Jul 8, 2007 1:29:37 PM
fustercluck, it doesn't count as government intervention if it benefits rich people ;)
Posted by: chris at Jul 8, 2007 5:09:53 PM
Fustercluck -- I lost my Utopian Libertarianism within a year of living in the Land of the Free. Something that works in practice should be modified very cautiously as Tyler noted secretly somewhere else.
How would canceling specific T-bills after a criminal action by a foreign government entity endanger the legitimacy of T-bills in general? It might actually increase legitimacy.
We could make a rule: When T-bills are owned by government agencies, we have the right to cancel them if they cheat us.
Posted by: ralph ruben emmers at Jul 8, 2007 6:11:48 PM
Who is "us?" You keep missing the point.
Intel isn't "us." Intel is a multinational corporation. Why should the American government get involved?
Libertarians in theory want less government involvement in trade issues. Do you, or don't you?
Posted by: fustercluck at Jul 8, 2007 7:28:31 PM
