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China should buy US companies with forex reserves

By Jiang Yong (Global Times)

16:09, October 12, 2011

Edited and Translated by People's Daily Online

China is falling deeper and deeper into a "dollar trap" after a series of misjudgments in its foreign exchange policy and the policy toward the U.S. economy. For example, the country wrongly believed that the United States had the ability and willingness to maintain a strong dollar, seriously underestimated the value of gold and predicted a gold bubble when gold prices just reached between 500 U.S. dollars and 600 U.S. dollars per ounce. Furthermore, it often fell for the lies of U.S. liberal scholars, financiers and politicians.

Among all of China's strategic misjudgments, the most serious one may be its decision to "ride in the same boat" with the United States. However, the same boat that carries China and the United States could be Noah's Ark or the Titanic. The United Kingdom, Soviet Union and Japan, which used to be among the world's most powerful countries and in the same boat with the United States, had all paid a heavy price for their misjudgments, as manifested in the fall of the United Kingdom, the collapse of the Soviet Union, and Japan's 20 years of stagnation.

The value of the U.S.-dollar-denominated assets held by Japan diminished by 40 percent after the country was forced to sign the Plaza Agreement. If China continues to tolerate the debt defaults of the two-faced United States, it is highly likely that the value of its dollar holdings will diminish by more than 60 percent.

To ask the United States to protect China's dollar assets is like asking a tiger for its skin. The United States has grown used to making generous promises to service its debt to China. "The United States can pay any debt it has because we can always print money to do that," former Federal Reserve Chairman Alan Greenspan said in a statement. It may sound shameless, but he was telling the truth. It would be foolish and naive of China to rely on the oral guarantee of the United States for the safety of its assets.

For the foreign exchange reserves of a country, the most important thing is the security but not the profitability. China has made another policy misjudgment in this area.

Essentially, it is not safe at all for China to put its money in the hands of the United States. For many years, as long as Western countries wished, they could always find an excuse at any time to freeze or even take away other countries' foreign exchange assets in their hands. Libya is the latest example. China should not only stop buying but also start dumping the U.S. Treasury securities and dollars on a large scale. It is an inevitable option for China to safeguard its foreign exchange reserves.

China kept buying U.S. dollars in recent years, and a seemingly adequate reason is that China cannot reduce them, because there is a dangerous balance of financial terror between China and the United States, and China has no choice. In fact, as long as China discards the interests of special organizations, groups and individuals, regards the interests of the country and all the people as the priority and re-examines its strategies and policies towards the United States, it will be able to find good solutions for its foreign exchange reserves.

After the sub-prime crisis occurred, the U.S. government started to hold huge amounts of stocks of U.S. enterprises. Therefore, China could ask for debt-to-equity swap, exchange its U.S. Treasury securities for stocks held by the U.S. government and then further exchange them for the preference stocks of the top 500 U.S. enterprises, such as Boeing and Microsoft.

Within the United States, a lot of infrastructure is old and worn out, and public transportation is insufficient. Therefore, China may exchange its U.S. Treasury securities for the investment stocks in this infrastructure too. Of course, the United States has been pursuing the absolute security of its national soil for a long time and probably will not agree China's proposal of debt-to-equity easily. However, the point is that China should not pin its security on the United States just like China should not pin its interests on the United States.

Michael Hudson, president of the Institute for the Study of Long-term Economic Trends, once advised to "use the dollars in hand to purchase American companies in China." Such operations could be regarded as a reasonable extension, since China is "transposing" the dollar bonds it held for the enterprise rescuing stocks that American government held.

Relevant experts were all confounded: "Is this not nationalization?" Yes, but what is so bad about "nationalization" in comparison with the Americanization, bubbles and dilution of our own assets? Did all those countries that propagate "free economy," like the United Kingdom and the United States, not take actions and implement nationalization when facing economic crises?

Of course, if "nationalization" is so dreadful after all, we could also choose to allow private enterprises to indirectly "purchase" the stocks of American and other Western countries' companies, i.e. "ethnical-ization." And then, China-capital private enterprises can deliver RMB funds to our country by means of profit repatriation, etc. In this way, the "salt water" of foreign exchange dollars can be transformed into the "fresh water" of RMB funds, which can be used to solve deficit problems, such as with old-age pension, social insurance, etc.

At present, the "compound interests" of the investments made by foreign-owned enterprises in China aggregate to around 3 trillion dollars. If transposed into stocks of 1 trillion to 1.5 trillion U.S. dollars, these can significantly reduce the risks of shrinking foreign exchange reserves and the prospect of foreign capital fleeing from China on a large scale. In this way, we can effectively guard against the risk of foreign exchange reserves being diluted by American, and we can greatly improve the business environment of China-capital enterprises and strengthen national economy and security.


Leave your comment6 comments

  1. Name

Jean-Francois Morf at 2011-10-1681.13.248.*
At your place, I would create an ETF containing all stocks of the world, and buy it massively!
Canada at 2011-10-1370.36.49.*
This is for China’s information – not for publication of your website. If China is looking to invest in corporate shares, Suncor, a Canadian oil sands producer with reserves of 50-100 years, could be considered. The stock symbol is su on the TSX stock exchange. The recent 52 week low was $23.97 – its 52 week high was $47.27. During the 2008 financial crisis it had a low of around $20.00. According to technical analysts its period of seasonal strength is from mid January until May. At the moment it is trading at $28.85. Canadian Oil Sands is another stock that could be considered, but it may be more risky. Some analysts say it has debt levels that may be high, also it needs a higher oil price to be profitable. It pays a quarterly dividend of 30 cents/share that the CEO says would be reduced if oil prices fell. The stock symbol is cos on the TSX stock exchange. It had a recent 52 week low of $18.17 and a 52 week high of $33.94. At the moment it is trading at $21.50. These stocks are volatile and have a big swing between highs and lows each year, so likely the best strategy would try to buy at a low and sell after it appreciates, each year. There are some in the business community who are opposed to China owning too much of the oil sands.
vovo at 2011-10-13115.135.79.*
Canada at 2011-10-1370.36.49.*
Hindsight is always marvelous, but China could not have foreseen the depth and scope of the 2008 financial crisis in the U.S. The financial firms and their investment products had been given a Triple A credit rating. I doubt China would want the shares in corporations that the U.S. purchased. Most, if not all of those corporations were bankrupt, or teetering on bankruptcy, and most likely it would be best to avoid holding shares in those corporations. I often listen to the business channel and there were only a couple of guests that predicted gold would rise above $500.00, and the investment community ridiculed them. A well known investment manager said his grandchildren would never see $500.00 gold.The North American stock markets are a giant casino, riddled with fraud. Holding stocks can be extremely risky, especially if the purchase price was high.The U.S. will no doubt look at ways to reduce what they owe China, and as the author mentioned, we’ve all seen what happened to Libya’s assets. What to do with the reserves is a problem.
Observer at 2011-10-13114.76.49.*
America needs to play fair and permit Chinese companies to buy their companies. A level playing field is required to reduce the American deficit.

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