Thursday, 28 August 2008

China Threatens to Raze the House of Cards

Via Bloomberg:

Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. "If it is not the end of the world, it is the end of the current international financial system.''

"The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. Yu is "influential'' among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year.


And from this morning's Financial Times:

Bank of China flees Fannie-Freddie

Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities. Asian investors, in particular, have become net sellers of agency debt, said analysts. However after a sharp drop in their market value last week, Fannie and Freddie have made a strong recovery after successful short-term debt sales. Fannie was 13.5% higher on Thursday and Freddie was up 12%. Bank of China’s disclosure on its holdings of Fannie and Freddie securities came as the bank reported a 15% increase in Q2 profit.

14 comments:

dink said...

How very obnoxious. All investments carry risk; perhaps Yu authorized the purchase and knows he is about to be called on the carpet for not doing sufficient research. Plenty of American pension companies are in the same position as China. If you can not risk losing, do not play the game.

Knute Rife said...

Every debt and equity holder of every company that gets into trouble makes these kinds of noises, right on into creditors' meetings in bankruptcy court. I find it hard to believe China is being so obvious. There may be something else at play, namely:

China has been feeding US overindulgence and holds bales of US paper. That paper is at serious risk, and an ad hoc devaluation leaves large holders more exposed than small (Among the large holders, China has more risk than the petro-states because its exports are more dependent on US demand.). If the US government assumes Fannie's and Freddie's liabilities, even in part (and followed shortly thereafter by the FDIC and further liquidity for the Fed's bailouts), that will require huge amounts of new US paper. This in turn will require a systemic revaluation of all US paper, and suddenly China is back on equal footing with every other holder.

I'm Not POTUS said...

I don't think Dink understands the Chinese mindset.
The culture of the government is that it is a forgone conclusion that events will unfold as they expect.

Black Swans are anathema to them and will not be allowed to damage or control them. They will execute extreme actions to wrest control. They must be the final arbiters of their destiny.

normal being said...

I think some Americans don't understand the situation. China is less dependent upon the US, than the US is on China.
Chinas model is based on maximizing capital investment and reaching economies of scale quickly. They have reached this now. They are still saving like mad (demographics), but consumer spending is rising quicker than growth now.
China has valued the American business so far, because the US had good international standing and the Chinese banking sector was relatively underdeveloped and couldn't manage the excess savings that were a fallout of the general plan.
But now that Chinese industry has passed the critical point, the American business might not be so valuable anymore.
The US role in the world is that of a pension fund, that doesn't produce anything of tangible value in the moment. And a pension fund with a questionable reputation easily gets into trouble.

Thai said...

Dink, we did guaranteed these debts. While I am the first to agree that investment carries risk, still at the same time, our country made a promise to back them... I'm not quite sure what it says about our national integrity when so many of our citizens are so quick to abandon those committments.

normal being said "... China is less dependent upon the US, than the US is on China"

Are you sure?

"Yes", we might depend on them to the extent we feel a compelling need to drive Hummers and live in 5000 sq. foot McMansions.

But to repeat an oft quoted saying: "When you owe 100K and can't keep up your payments, you have a problem. When you owe a billion and can't keep up, the bank has a problem".


While it sickens me to see how much savings of so many hard working Chinese America has squandered (I truly hope this national gluttony comes to an end one day), yet America survived for >200 years without Hummers and McMansions, I am quite confident it will do so again.

yoyomo said...

For more analysis on this story, please see:

http://www.lewrockwell.com/rozeff/rozeff214.html

Thai said...

Hey yoyomo :-)


Seems like a reasonable 'fractal' analysis we can agree on... The replacing of one empire: western imperialism, or more specifically its latest iteration- American, imperialism, with another: Western thought/culture.


If I am reading you correctly, you and Niall Ferguson seem quite close in this regard.

I have an interesting 'thought excercise' question for you in that same theme:

Would the fact that China looks more and more like what it 'outcompetes' every day bring a smile to it's intellectual great great grandfather (Plato)?

The more you look at things, the more they look the same.

Hope you are well

Anonymous said...

However after a sharp drop in their market value last week, Fannie and Freddie have made a strong recovery after successful short-term debt sales. Fannie was 13.5% higher on Thursday and Freddie was up 12%.

With all of the Fed's lending facilities, isn't there a sliver of doubt in your minds that somehow these 'strong' sales are fabricated?

armchair said...

Several months back there were many predictions that China's posture toward its financing of U.S. and GSE sponsored debt issues would change as soon as the Olympics were over.

This seemed like an odd prediction at the time, but after the opening ceremony it became very obvious that Beijing was making a very big deal out of the Olympics. Perhaps Yu is simply laying the groundwork for pulling the plug.

yoyomo said...

Hi Thai,
I have little hope for the future of humanity because whoever reaches #1 refuses to play by the same rules as everyone else and so the sanctity of the law is sacrificed for momentary gain. I blame the US much more than previous empires because none has ever been as secure from existential threat as it is. It has the luxury of taking chances in supporting a stable multi-polar structure that accommodates the legitimate interests of other countries without jeopardizing its own security but instead tried to steal the whole pie. My mom used to say "he who tries to have everything squanders everything (that he already has)".

Greedy Bushler (& Clinton to a lesser extent with his BS on Iraq and Yugoslavia) ruined the best chance in centuries for a just and stable world order based on fair application of the law. Instead the US has tried to use the law as a weapon against any country that wanted to maintain its independence from predatory capitalism and for the next century or more the law will be looked at as the cynical tool of hypocrites and only force will be respected. Thanks chimp-boy.

Anonymous said...

As much as I detest Bush and all his policies, the idea that a majority of easily swayed citizens of a democratic and capitalist unipolar power are going to voluntarily create a stable world order for all to benefit is probably not one we'll ever see come to fruition. Every democracy so far has failed; the current ones will eventually too. Intergenerational conflict and the limited perspectives of most humans will always doom democracy. Of course, it's still better than the alternatives.

Thai said...

Anon 09:31 said

"...the idea that a majority of ... citizens... are going to voluntarily create a stable world order for all to benefit is probably not one we'll ever see come to fruition"

I would only disagree with this to the extent it fails to recognize those citizens would "voluntarily create a (new... stable is always an illusion) world order" if it were in the majority's personal benefit.

For while I agree with anyone who says the evidence is quite strong that 'partisans' of this planet have prevented many significant collective actions to date; one could just as easily argue its inverse, that 'plato' is winning the war (albeit slowly) and that cooperation is getting better every day.

It just depends on your point of view.


And when you say: "Every democracy so far has failed; the current ones will eventually too. Intergenerational conflict and the limited perspectives of most humans will always doom democracy"

So too do I again take exception with any particular focus on the word democracy. For IF chaos theory and complexity science have taught us anything, it is that EVERYTHING is ultimately doomed.

But so what?

Democracy is no more or less 'unstable' or 'stable' or 'doomed' than any other system.
Sure evolutionary systems will ultimately tear things down (just as they build new systems and structures to replace the old).

It's just the price of life.

Since we like it, awareness of these instabilities or flaws give us no less reason to 'fight' for it.

Thai said...

Oh and yoyomo, when you say "I have little hope for the future of humanity because whoever reaches #1 refuses to play by the same rules as everyone else and so the sanctity of the law is sacrificed for momentary gain"

Do you mean this would come true if you became our #1?

I honestly have faith in you that it would not.

Why will you not have the same faith in others?

yoyomo said...

Thai,
I could never reach #1 as I don't have the political personality necessary for success in politics. Re-read the quote from the Rozeff article.

"That is, open political competition favors aggressive, hence dangerous, rather than defensive, hence harmless, political talents and will thus lead to the cultivation and perfection of the peculiar skills of demagoguery, deception, lying, opportunism, corruption, and bribery. Therefore, entrance into and success within government will become increasingly impossible for anyone hampered by moral scruples against lying and stealing."

Anyway, I was referring to nations and not individuals.

Anon(8/30-9:31),
Accommodating other nations' legitimate interests often would be worth the sacrificed advantages as it will spare you the military costs which only TPTB benefit from.